PaymentsJournal

Digital payments continue to evolve, and consumers are here for it. If businesses or financial institutions are not equipped to deliver embedded payments, today’s customers will simply seek the ease and convenience of a seamless payment experience elsewhere.

A recent discussion between Hal Ramakers, SVP of Global Solutions at Brightwell, and Brian Riley, Director of Credit and Co-Director of Payments at Javelin Strategy & Research, probes deeper into embedded payments and what businesses can do to meet evolving needs in the global digital payment landscape, how to facilitate cross-border payments amid myriad regulatory infrastructures, and how to gear up their businesses for new user expectations in cross-border payments.

The secret to building retention and loyalty is to innovate the consumer experience. As more consumers choose digital payments to conduct their everyday business, they want something that is seamless and streamlined, rather than having to jump from one platform to another.

“If you look at the industry today, most consumers work with third parties,” Ramakers said. “They’re leaving their banking app to send money, which is not an optimal experience.”

Embedded payment solutions allow customers to purchase items directly from their TV, pay for a cab ride, and even send and receive funds from all over the world, all without taking out their wallet. This trend will only continue to grow.

“There are over a billion people today that send or receive international money transfers. That’s about 30% of the global (consumer) population.”

“Globally, checks are still being sent across borders for vendor payments and consumer payouts. The pandemic shifted the world and moved us five years forward. As a result, consumers changed how they interact with companies and their financial institutions. They’re looking for embedded solutions when they conduct business whether in their bank accounts, through their banks, or through a program managed using a digital solution.”

Embedded payments solutions, which allow customers to seamlessly and securely make transactions within a product or service, can enhance customer loyalty by providing a convenient and efficient payment experience. By integrating payments into the customer journey, businesses can improve overall customer satisfaction and increase the likelihood of repeat purchases.

“If it’s a service that a financial institution doesn’t offer, the consumer’s going to find it elsewhere,” Riley said. “Do you risk having that customer go to a money transfer operator, where they can get distracted by cross-sells that happen within their ecosystem? Having that as a service option embedded becomes a no-brainer.”

“From the consumers’ side, they want to conduct the business where they get paid,” said Ramakers. Getting paid within an app and having the option of global remittances can be a convenient and seamless experience for users, making it a sticky feature that encourages continued usage.

“They go in (the app) to check their balance and realize they just got paid. They then remember that they have a family member in the Philippines that they need to send some money to, so they want to send money right through the app. This process is more streamlined than signing up for another money transfer application in addition to their banking app.”

Riley hit on another aspect of embedded payments that provides valuable insights.

“When you get the social aspects of this, too, it gets fascinating because people align themselves to the components of the products they need,” he said. “Making my mortgage or rent payment is an unemotional experience, and it’s just a function of what I have to do when paying bills online.”

“But moving $500 to my mother in the Philippines, for example—that’s a need-to-have function. It improves the whole stickiness of that relationship where the household payment is a commodity item. This is a special item a person wants to do, and they’re going to be doing it for years to come.”

“It’s also important to understand the cultural needs of your users and also why cross-border payments are important,” Ramakers said in picking up that thread. “In many cases it’s about supplementing and taking care of their family incomes, the family unit, etc.”

“Although one person is living here in the U.S., the rest of their family is still in the Philippines, India, or even Latin America. They are supporting their families back home.”

Remittances often provide crucial financial support to families and can help improve their standard of living. It plays a vital role in supporting family members by providing financial assistance for basic needs such as food, housing, and healthcare. In many cases, it can also help families afford education and other investments in their future, improving their long-term prospects and economic stability.

Analyzing cross-border payment transactions can uncover a treasure trove of opportunities. 

Many businesses lack the data necessary to see what their customers are doing when they send and receive payments.

“A lot of companies don’t realize how big the cross-border industry really is. When you start talking about 13% of people, sending money or receiving money, it’s a large number and you have to look deep into your data to be able to see that,” Ramakers said.

“It could be your ATM transactions where money is being pulled out and going to a retail location that’s out there or a POS transaction that’s occurring. It’s interesting when we’ve looked at some key companies interested in understanding what their consumers are doing.”

By utilizing cross border payments data, businesses can gain valuable insights into customer behavior and preferences across different markets, which can help identify untapped growth opportunities. Analyzing transaction data can reveal patterns and trends that businesses can leverage to develop targeted marketing strategies and tailor their products and services to meet the specific needs of customers in different regions.

“When we look with our partners at the data, we see all these transactions. It becomes very enlightening to a company when they start looking at the data and realizing what is happening and it presents some great opportunities for sure.”

That said, we want to enable banks, program managers, and corporations to keep those users in their ecosystem.

When it comes to developing an effective embedded payments solution, there is no one-size-fits-all product. Business-to-consumer (B2C) and business-to-business (B2B) transactions have their own payment nuances that need to be addressed.

“There’s a couple of things about cross-border payments that are significant,” Riley said. “First, you have two worlds. You have B2B and B2C — those different ecosystems bring some specific challenges. What you need is to have the infrastructure that makes it work seamlessly.”

“You can’t have someone try to make a payment in a foreign country and then get bogged down in slow or ineffective processing.”

“So, consider this: there’s over 200 countries in the world that have different compliance requirements. Then there’s the data that’s needed to complete those transactions. This isn’t just a simple build. For the average company, it can take up to a year to build their own solution.”

That’s why many banks, program managers, and corporations are turning to remittance and disbursement platforms to bring solutions to market for their consumers far faster than developing them in a silo. Further, platforms that collaborate and partner with the right payment networks will fuel more innovation within the cross-border-payment space.

“A good cross-border solution is difficult to create with a single partnership,” Ramakers said. “You need to integrate into multiple connection points, which is one of the things that makes it so complicated. You need to have access to bank account payments.”

“At Brightwell, we do that in over 180 different countries globally. We also have access to over 290K cash-out locations globally. And with the addition of our recent Visa partnership, that’s going to hit over 5 billion card account endpoints that lead into an account.”

“We’ve integrated into over six different providers, and on average, that’s a real drain and it’s extremely expensive from a product and development perspective. You take five to seven months to do those integrations, and that’s a hard case to build.”

“Once you start working on the integrations, you’ve got to deal with the compliance components behind it. There’s a lot of heavy regulation around making cross-border payments, and that expertise isn’t based in a lot of the companies and the financial institutions today.”

Anti-money laundering (AML) and Know Your Customer (KYC) are some of the many compliance and regulatory elements that are required to enable digital remittances to work safely and securely.

“How do you simplify that? This is one area where we’ve focused on. We’ve taken our experience and asked ourselves: How can we take what we have learned and our expertise? How can we apply that to the industry? That’s what we’re doing today with our new ReadyRemit platform.”

After years of servicing global workers and integrating with countless remittance partners, Brightwell understands the arduous process of building out a compliant and user-focused payout solution. ReadyRemit solves these challenges, making it easier than ever to enable cross-border payments.

“First, if you’re going to integrate it into your app, ease and cost are priority,” Ramakers said.

“You need to find a platform like ReadyRemit where we have that capacity and we’ve done the work for you. We are integrated into all of the best rails across the board. We have simplified the experience.”

“We’ve created APIs and SDKs where now clients can integrate the service easier and faster in 30 days or six weeks into their solution. You need to find a creative solution to that and, secondly, compliance. Remember: These are not just domestic payments.”

“We’ve learned a lot in 10 years in our experience dealing with cruise lines and global crew members. So over that period, we’ve been doing substantial cross-border payments around the world. We had our own card program and still do this today. Now we see that there is a need to enable other companies to take advantage of the kinds of expertise that we have. Most companies out there are more about building their brands. They have partial networks, and they have pieces of the program. There hasn’t been a great unification aggregation platform to bring it all together and make it simple and easy. That’s what it really comes down to,” Ramakers said.

“There isn’t one provider that can give you the fastest payments into every corridor, or the best coverage globally into a corridor. By using an aggregation and embedded platform like what we do with ReadyRemit solves a lot of those problems for you.”

If you are looking more carefully at cash flow after the collapse of Silicon Valley Bank, you are not alone. One place to look is automating accounts receivable (AR).

With the increasing digitization of all aspects of finance, AR sticks out for its antiquated processes. Most businesses still do AR manually, and changing from that process has not been top of mind. But it should be.

Automating AR has the potential to increase cash flow, save businesses a lot of money, improve customer service, and be more environmentally friendly. Digitizing AR also makes it possible to use artificial intelligence and machine learning to parse AR data and find patterns that can be used to improve the business in surprising ways.

In a recent PaymentsJournal podcast, Steve Murphy, Head of Commercial and Enterprise Payments at Javelin Strategy & Research, and Bob Purcell, CFO of Billtrust, discussed the many benefits of automating AR. Many people think that it isn’t worth the cost or effort to automate AR and that there are no synergistic benefits for a business by doing so. Their conversation counters that assumption.

The pandemic and the recent bank collapses have reanimated the importance of managing working capital.

The pandemic led to a significant disruption of supply chains and increased uncertainty in the economy. The bank collapses have also highlighted the importance of working capital management as businesses have struggled to find alternative sources of financing. Many companies were caught off-guard by the bank collapses and have had to scramble to find alternative funding sources to maintain their operations.

In preparing for a downturn, companies should focus on what they can control and make their businesses more efficient. Shifting from manual AR to automated should be at the top of the list.

Manual AR tasks inhibit cash flow and increase operating costs. Automated AR processes improve cash flow and reduce costs. 

“We’ve reached an inflection point in our profession,” Purcell said. “Finance leaders across our customer base are beginning to understand that digitally transforming AR and adapting technology bolsters our financial resilience.”

This shift has been a long time coming.

“AR software penetration is only around 24% of companies today, meaning that over three-quarters of businesses are still relying on manual processes and working with cumbersome legacy systems that slow down cash flow,” Purcell said.

“According to AFP,.33% of B2B payments in North America, and 31% globally, are still made by a paper check. So, it’s really time for corporations to fortify their businesses through AR digital transformation.”

Automated AR allows companies to forecast their cash flow better. It is particularly helpful for companies with lots of remote employees, as payments can be moved quicker, without having to rely on the mail.

But there are likely to be additional payoffs in efficiency from automating AR, the kind that can’t necessarily be seen in advance.

“Once companies start processing AR in digital software, they can then take advantage of the machine learning and other AI capabilities,” Purcell said.

Purcell gives a few examples of how this data could help make a business more efficient.

“AI and machine learning can potentially inform you about what segments of your market pay faster than others, thereby helping you determine your ideal customer profile,” Purcell said. This information can help the company decide which customers to target in advertising and outreach.

When humans are involved, human error follows. So reducing human involvement in AR has the potential to reduce costly errors and produce savings on labor.

Moving toward automation makes things more efficient, predictable, and reliable across the board, thereby improving customer service. “After implementing our software, our customers say they have around 25% better customer service levels,” Purcell said.

The move toward automation also improves liquidity.

“Two of our many responsibilities as CFOs are safeguarding our assets and improving cash flow, right? The banking crisis has definitely caused us to step back, take stock, and create an alternative plan to what we do,” Murphy said.

Automating AR can interface nicely with new methods of customer service, including chatbots. With ChatGPT-4 now on the market, companies are hustling to incorporate it into their products, and AR will be no different. Doing this well can allow a company to downsize its AR staff and customer service staff, generating significant savings.

“There are exceptional companies out there that embrace AI and machine learning, that are making it a lot easier to manage your money without needing to contact a customer service rep,” Purcell said. “You’re told (in) real time what things look like.”

A bonus to automation is that it involves less paper, which makes a company’s operations more sustainable.

“The environmental effect of having automation can be really substantial,” Purcell said. “One of our customers digitized nearly 1.5 million of their invoices, in 2021. They found that automation saved them over 170 trees, 159,000 gallons of water, and 189 million BTUs of total energy.” Another big benefit is that automation positions businesses in a way that is attractive to Generation Z customers. Gen Z prefers convenience and a digital pathway in B2B payments. Companies that develop systems that are as sophisticated and convenient as the best P2P applications will be the most successful at keeping Gen Z as clients.

Real-time payments (RTP) continue to become more of a part of everyday life for consumers. While RTP systems are more mature in other parts of the world, the U.S. is slowly catching up. The Clearinghouse launched its RTP Network in 2017, the first payments rail in the U.S. designed to handle real-time transfer of settlement and funds. The Federal Reserve is scheduled to launch its FedNow RTP service sometime in 2023.

The manner in which real-time payments evolve in the U.S. may be a bit different than in the rest of the world, however. This is due to the massive number of financial institutions in the country (more than 9,000 combined banks and credit unions) as well as a different regulatory environment.

To discuss the unique ways in which real-time payments may evolve in the U.S., PaymentsJournal recently hosted a podcast with Rodrigo Figueroa, COO of Chargeback Gurus, and Brian Riley, Director of Credit Advisory Service at Javelin Strategy & Research.

Simply put, a real-time payment is when a sender initiates a payment, the RTP provider validates it, the funds are immediately settled in the receiver’s account, and a confirmation message is sent back to the sender. RTP transactions allow for open loop transfer directly between bank accounts, unlike services such as Venmo, which tap into a prepaid fund balance managed by that payment platform.

“More importantly, each bank has an immediately updated ledger; when you have a debit shown on one bank, that same position is recorded immediately on the ledger of the receiving bank,” Figueroa said.

He added that digital trends in other aspects of life and consumer expectations are forcing banks and payments providers to offer real-time payments capabilities.

“From a behavioral perspective, we are getting used to everything being in real time,” Figueroa said. “So, this isn’t coming out of nowhere.”

Eventually, we will have a global set of interoperable, connected real-time payments rails, though the industry is not quite there yet, he added.

Real-time payments have several benefits. The obvious one is the convenience for sender and receiver to immediately see their updated accounts after the payment is sent. Real-time payments are especially desired by those who work in the gig economy and perhaps cannot wait weeks or even a month to get paid for the work they do, Figueroa noted.

“For a lot of people, cash flow matters,” he added. “They can’t wait until the end of the month for a check.”

In general, consumers have come to expect “instant gratification. Everything on our phone is a few clicks or swipes away,” Figueroa said.

Another key benefit of real-time payments is the extra data involved in them. The payment record includes all of the data associated with the transaction, thus eliminating the confusion that can result when a pending transaction is settled with an unclear or cryptic description days after it was initiated.

Figueroa also noted real-time bill payments as a key benefit, since RTP funds settle the instant, the payment is made. This helps consumers avoid situations where they pay a bill online on the date it is due, but it doesn’t settle until a few days after that.

Still, real-time payments are not without their own unique challenges. One is fraud, noted Riley. Since the payments are immediately settled, criminals can engage in payments fraud and make fraudulent transactions before anyone notices.

“The easier you make it for consumers, the easier you also make it for crooks to take advantage of,” he added.

Another issue is difficulties with refunds and chargebacks, Riley added. For example, when making a payment now on the Visa or Mastercard network, it takes a few days to settle. If a consumer wants to return a faulty item or wants a refund on a service that was not provided as described, it’s easier to initiate a dispute and return the payment during this intermediate time. It becomes much more difficult in a real-time environment.

“It will be interesting to see how the regulations develop around this,” said Riley. “This is a really important piece that affects the whole ecosystem.”

This will be exacerbated by the sheer number of transactions made daily in the U.S. Riley noted the real-time payments system M-PESA in Africa, which may process 100,000 transactions a day.

“That’s similar to the volume we might get here just in the state of New Jersey,” he said. “In the whole U.S., we’re talking billions of transactions. It’s a massive amount of volume”

It’s not just sheer volume, but the unique regulatory environment in the U.S. that will make real-time payments implementation here different than in the rest of the world, noted Figueroa.

In other countries, the regulatory statutes are generally created before innovation is built, whereas in the U.S., often technology innovation gets ahead of regulations.

“I’m not saying that’s good or bad, it’s often just how it is here in the U.S.,” Figueroa noted.

On the flip side, being a bit late to the RTP game means that “the U.S. gets the benefit of looking at what happened around the world [as it relates to RTP] and seeing the good and bad and creating a better product,” he added.

Furthermore, given the fragmented nature of the U.S. financial system, there may never be one cohesive real-time payments network that everyone uses, said Figueroa.

“The U.S. may never have one standard because we have so many competing entities,” he observed. “Having such a big market allows all these elements to compete with one another. Don’t take it for granted that it will eventually all consolidate into one network, like in other countries. The key is having interoperability between all these competing networks.”

With FedNow launching this July, successful implementation of real-time payments systems will require banks to test both the technical and operational side of their operations. In a previous discussion with PaymentsJournal, Form3 touched on the importance of banks having not only the technical aspects in place, but also transaction reporting and operational considerations.

Testing early is key to ensuring that both real-time payments (RTP) and FedNow functionalities operate at their peak, delivering on the benefits they set out to bring. During a recent PaymentsJournal podcast, Miriam Sheril, Head of Product, US, at Form3, and Steve Murphy, Director of Commercial at Javelin Strategy & Research, discussed why testing — which is typically an afterthought for many banks — should be more of a priority.

The race to ubiquity for real-time payments should not just involve throwing money into the latest technology to support real-time payments. Careful testing early on should be at the forefront before full implementation can happen successfully.

“It’s not just having the best technology and technology that’s fit for purpose, but it’s also how you go about your entire project and life cycle of getting that technology in place,” said Sheril. “Testing becomes an afterthought for banks – and for all companies, frankly.”

“They build it, they do their documentation, they work on the operations around it, they implement the ecosystem [of tools needed (like a UI)] around the new solution, and then start testing it end-to-end and find issues — whether it’s a technical error that’s wrong or the procedure that’s wrong,” she said. “[They find those issues] late in the game, which means they have to go back and fix it. It’s more costly, it takes more time, and it’s difficult.”

“For real-time, if you wait until the end to do all this testing, you’re going to end up having an issue. Your project might end up getting pulled if it costs you double the amount of time to fix that. Being an afterthought is a mistake in this new agile world. For real-time payments specifically, you can’t do it so late because it’s 24/7, it’s all brand new.”

According to Sheril, RTP and FedNow won’t interoperate, so even if a bank is on RTP, if it wants to receive the FedNow payment, it’ll have to connect and get its solution working for FedNow. “There are similarities, but there are also differences, and you have to test those differences,” she said. “If there are enough differences, that means you need to adjust your solution and you need to test how that solution works for FedNow.”

“There are some things that should be the same, and banks should try to make them the same so they don’t have to retest. Hopefully, many banks can align to whatever they’re doing for RTP, if they’re already on RTP, in which case, light touch testing might be appropriate. This is another example of where testing earlier will help you. The only way to know that it’s going to be the same is if you test it as early as possible. This is the shift in mindset that we need to see happen so we’re not all facing the issues later in the game.”

Although real-time payments have already been around for roughly five years, it’s still a new process that has plenty of room for error. That is why preventative maintenance in the form of early testing is necessary.

“Real-time is interesting, there’s the good and the bad,” said Sheril. “The good is that it is brand new, and brand new is helpful. You’re not building or adjusting something that’s already in production. Since RTP and FedNow are new, those who are implementing it are implementing new solutions, new systems. Many are using it as an opportunity to do their first stage of modernization and put in a new core just for this. That gives them a little flexibility because they’re not worried about breaking something that already exists. The flip side is that it is brand new. Brand-new things can also be risky.”

When it comes to testing, there’s the technical aspect of it and there’s the operational part — with each having its own level of difficulty, according to Murphy.

Sheril agreed. “That technical piece, it’s kind of the same for everyone,” she said. “The gateways provide messages; they put rules and different error codes around the messages. It’s not very nuanced. You can build and test that pretty early on and use an experienced service provider, who can test that holistically for everyone, and it doesn’t have to be nuanced.”

“When we go live with our RTP solution, we’ll have tested the gateway piece. Holistically, it’s going to work because if it works with one bank, it works for the other bank. Then there’s that whole second part of it that’s really specific to each bank and each customer. How do I plug it into my operations, into my core banking, into my resiliency posture, my risks, etc.? And that has to be tested as well,” she added.

“I have to test that my operations team, who suddenly had to go 24/7, can support that 24/7, that they know what to do when [an] alert comes out, that they can follow those next steps, that they can get the money to where it needs to go and make the funds available [if an exception occurs] — and that part’s harder.”

When it comes to testing, it will largely depend on the type of use cases carried out — and also depend on the bank. It’s not a one-size-fits-all approach.

“If you’re a bank that has a lot of bill pay that you support, you’re going to test the request for payment flow,” said Sheril. “Not every bank’s going to do that. But at the end of the day, there’s a set of messaging that these schemes provide and you test those. Form3 is going to test all of them and have them ready and available whether you use it or not. It’s going to depend on what core you use, and what your operations procedures look like. It’s going to depend on how you integrate into other systems within your environment.”

Learn more about Form3’s instant payments testing simulator here.

For those who have already implemented real-time payments, the testing methodology is probably already there, and it may need to be adjusted.

Those who are waiting for the launch of FedNow have a golden opportunity to start on the right foot, honing in on the end-to-end process.

“If you’re a bank that’s been on RTP, you’ve done that, you have a head start, and it’s not that different,” said Sheril. “There are differences so you should test that gateway differently, but your end-to-end processes should be pretty aligned.”

“If you haven’t been on RTP and you’ve just been waiting for FedNow, this is something that’s brand new,” she said. “You have an opportunity to do this differently. You don’t have to go in and touch something that’s already in production. Anytime you can start something from the scratch, you have an opportunity to do it right and really focus on end-to-end process.”

“Consider a modernization effort. We have seen a few banks who have said that for real-time being new in the U.S., the volumes haven’t picked up yet. It’s also an opportunity for me not to just put in a new gateway scheme connection, but a new modern core.”

Checks have seen a steady decline in use — with a 2021 Federal Reserve survey finding a decrease of 7%-8% in check volume annually — but the same clearing processes must still be performed by financial institutions. This reduced volume is prompting financial institutions to consider ways to minimize costs and increase efficiencies in the item clearing and settlement process.

When Check 21 was instituted in 2004, there was great excitement about the new process of handling checks electronically. However, as with any innovation that involved image and electronic processing of checks, it was expensive. Over time, as more financial institutions adopted this technology, the costs did eventually decrease as these processes became more efficient and refined.

“I think the death of the check was greatly exaggerated,” said Tony Rosetti, Director of Fiserv Clearing Network at Fiserv. “Checks are still going to exist. And as the volume continues to decrease, financial institutions are at a tipping point where prices will increase.” 

“Checks aren’t going to die,” said Brian Riley, Director of Credit and Co-Head Of Payments at Javelin Strategy & Research. “They’re going to decrease — I agree with that. But there are still times when consumers and businesses need checks, and that brings out the importance of engineering your clearance network properly.”

“You shouldn’t just set that and forget it. As volumes go down and pricing models change and the whole dynamics change, it’s really a good time to understand what’s going on in your clearance process and to make sure that it’s really managed and engineered to the best possible way.”

Banks currently have a few options for their check-clearing needs. These include the Federal Reserve, private sectors, and private exchanges.

According to Rosetti, the private sector was the catalyst that drove the costs of check clearing down through its less expensive channels over the years. Although the Federal Reserve basically sets industry pricing, they have increased fees over the past few years. The pricing increase is actually a participation fee that is assigned to every financial institution.

When it comes to the check-clearing process, financial institutions want to take the most affordable route.

Rosetti added, “Financial Institution’s want the least expensive way, but also want speed and accuracy with their available technology to present, process, and collect funds.” The Fiserv Clearing Network has a 24/7 processing window. The collection process starts in the early afternoon and continues throughout the day. Checks collected are transmitted for presentment within hours and the speed of collection is key to mitigating risk. Fiserv Clearing Network is poised with Fiserv technology to reduce collection time to transmit checks in a more “real time” environment.

Customer service is also very important to financial institutions. Private clearing networks, like the Fiserv Clearing Network offers an end-to-end experience including detecting duplications, adjustment processing, acceleration of exceptions, and mitigating fraud.

In addition, Fiserv has incorporated the collection of Canadian checks and is able to capture, transmit, and settle these items as well. The Fiserv Clearing Network Canadian Image Service, in partnership with PCBB, removes manual processes and any physical shipping, as well as significantly reduces collection time. The service provides collection for items in Canadian or US funds, offers daily exchange rates guaranteed at capture through presentment, delivers real time OFAC verification and 100% funds settlement within two business days.

As previously discussed, checks, much like cash, will never become obsolete. “Checks are still going to be around” said Rosetti. “As the check-writing generation ages, we are going to see less check writing, but they’re still going to be there. They are still an important payment vehicle.”

Their continued existence within the payment universe means that checks will need efficient processes in which to settle faster.

“With the Fiserv Clearing Network and Fiserv technology, we’re going to continue to provide the services and improve the services of check collection,” said Rosetti. “Whether it’s the last five checks that are out there, we’re going to make sure that they get presented and received and processed as quickly as they can.”

“Checks aren’t dead — they’re still going to be out there for a while,” said Riley. And you still need your check processing to work well. It’s not just submitting a check for payment; there’s settlement and clearance processes that need to be worked out. What do you do with exception items? That’s where service private network comes into play. You have the infrastructure there that allows leading-edge equipment and well-engineered processes to apply to financial institutions of any size.”

Artificial intelligence (AI) and biometrics are revolutionizing regulatory compliance in fintechs and banks by providing more accurate and efficient methods of identifying and preventing fraudulent activity, as well as streamlining compliance processes.

Traditionally, compliance has been a tedious and time-consuming process, requiring manual checks and reviews of transactions and documents. But with the help of AI and biometrics, compliance is becoming a lot more efficient and effective. In a recent PaymentsJournal podcast, Micheal Sheehy, Chief Compliance Officer at Payoneer, and Marco Salazar, Director of Technology and Infrastructure at Javelin Strategy & Research, discussed the future of meeting compliance challenges.

The biggest challenge for fintechs in compliance is the cost of implementing Know Your Customer (KYC), a process fintechs use to verify the identity of their clients and assess their potential risks for money laundering or financing terrorism. Fintechs may need to go through a KYC process when onboarding new customers, setting up new accounts, or conducting certain financial transactions. This typically involves collecting and verifying personal and financial information, such as name, address, government identification, and employment status. Fintechs may also need to monitor their customers’ activity over time to ensure ongoing compliance with KYC requirements.

“Especially when you want to be global and operate in multiple jurisdictions, you know, the different KYC nuances can be costly,” explained Sheehy. “The repercussions of not having an adequate KYC program or adequately funded compliance programs are significant. [That] there are $10 billion in just KYC fines last year globally just shows you how serious regulators are taking KYC.” Furthermore, different countries are developing different regulations so staying on top of everything is a challenge.

“Criminals are always trying … to find loopholes in the system,” Sheehy said. “So [compliance] is about being proactive. This involves having processes and procedures in place to analyze the trends that you’re seeing not only in your own transactions, but also at a more macro level within the environment that you operate in.”

As a company that interfaces with regulators and fintechs looking to meet those regulations, Payoneer acts as a steward of the global economy and makes the complex world of regulatory compliance simpler. “The complexities outlined by Micheal drive this desire for simplification, which will require an iterative process to attempt to get there,” Salazar said.

To meet different stringencies of KYC regulation around the world, many companies use the approach of just trying to meet the strictest requirements. But this can backfire for companies based in heavily regulated countries, such as Singapore, seeking to grow globally. For such companies, “when you’re dealing with customers in the U.S., where the KYC requirements aren’t as stringent in the regulations, you’re putting yourself at a competitive disadvantage compared to your other peers that may not be operating globally,” Sheehy said. Complying with local regulations is challenging even for the biggest multinational companies. “Apple and Google are trying to scale globally but are restricted by local legal mandates,” Salazar said. “They’ve run into regulatory issues where they have to decide whether to [incur] fines or scrap complete products.”

One way AI is improving compliance in fintechs and banks is through the use of machine learning algorithms. These algorithms can analyze vast amounts of data, identify patterns and trends, and make predictions about future events. This enables banks and fintechs to identify and prevent fraudulent activity before it occurs, rather than reacting after the fact.

“Historically, compliance was, you know, detect and report, detect and report. Now we’re moving into effective prevention and also more real-time reporting,” Sheehy said. “Machine learning and AI really allows you to operate in more of a real-time environment versus a traditional rules-based environment. The traditional model involved using rules such as if A happens, do B, or if C happens, do D. In contrast, machine learning will enable you to enact preventative measures and have more insight into how your customers transact. And it also enables you to operate in a more real-time manner.”

For example, Sheehy described how Payoneer used AI and machine learning to model merchant behavioral patterns in a certain jurisdiction selling certain goods. “Is a merchant new to the market? Or is it an established merchant and [has] been operating for 10 years? You’re not going to treat them the same,” Sheehy said. “Someone who’s growing and starting a business will have smaller payments that ramp up over time. A more established customer that will have large volumes that peak throughout seasonal periods.”

AI models can help fintechs segment their merchants by type and predict what will happen in the future. “If somebody receives a large payment, your model could say, well, I think that x is going to happen. This could trigger a request for additional KYC verification or pause that customer’s activity.

With AI, machine learning models can be tailored to specific countries or markets. “With the emergence of technology and new platforms, we’ve had this acceleration of data governance standards, even though they’re still very disparate across regions,” Salazar said. “We’re starting to see the ability for these models to really learn and … drive impact within those regions, which makes a big difference.”

Alongside AI, biometrics is also making waves in the compliance world by using physical characteristics for identification and authentication. This allows customers to easily access their accounts by simply looking into a camera, eliminating the need for passwords or other forms of authentication. Banks are also using voice recognition software to verify the identity of customers over the phone, as well as fingerprint scanners to ensure secure access to accounts. It’s a lot harder to impersonate someone else’s facial features or voice or fingerprint than it is to guess their password.

“Everybody uses biometrics, when they unlock their phone, when they use Apple Pay, when they use a fingerprint on something. It’s already kind of a standard,” said Sheehy. “I think biometrics is tied significantly with digital identities, which I’ll go into in a second. After the Equifax data breach, COVID unemployment scams, and PPP loan scams using stolen identities, it really became obvious that the only way to prevent this fraud is a live biometric check. Tying this together with digital identities is super important. By leveraging a government database to pull someone’s digital identity and cross-checking it with a biometric test, you can tie the two of them together.”

Globally, digital identities and biometrics are much more advanced in Africa and Asia, with Europe and the U.S. lagging somewhat. But Sheehy claimed that biometrics will be the standard globally within the next two years. “Singapore and Malaysia have actually mandated biometrics in their KYC. They’re telling the financial institutions in those markets, if your customers are not in front of you when you’re selling financial products, you need to have a liveness and KYC check. They go so far as to claim that they will not accept identity theft as a typology within their economy anymore.”

Artificial intelligence and biometrics are more than just cool gadgets — they’re improving the compliance function in fintechs and banks in a big way, helping keep our money and assets safe and secure. Biometrics are still not perfect, “but it’s a significant change from five years ago, where people were just taking pictures of their IDs and uploading them and applying for mortgages and things like that,” Sheehy said.

In the United States, looking forward, for biometrics to have wide-scale adoption, it requires standardization and government regulation around data. “Right now, regulation of biometrics is at the state level. We need more of a federal mandate, which I believe is coming. Until then, it’s kind of the Wild Wild West.” Part of this regulation could be in the Consumer Data Privacy Act that is currently being debated in Congress.

As various KYC regulations change throughout the world, Sheehy is optimistic that Payoneer can be part of the solution in making payments more secure while complying with regulations and innovating in machine learning and biometrics. The future certainly seems bright for companies that can help simplify international regulatory complexity while making better use of customer and business data.

With the upcoming launch of the FedNow Service, real-time payments continue to be a topic of discussion as demand grows among customers and businesses. More financial institutions are seeing the importance of enabling a range of real-time use cases to remain competitive and enhance the customer experience.  

Less than 10 years ago, real-time payments capabilities were limited to specialized and sometimes costly options, such as wire transfers. Since the launch of Zelle in 2017 and The Clearing House RTP® network a few years ago, real-time payments have become increasingly accessible.  

“Fiserv has about 1,200 financial institutions that have launched some form of real-time payments,” said Tim Ruhe, Vice President of Real-Time Payments at Fiserv. “And a lot of that is Zelle person-to-person payments. And now most of those financial institutions are looking at how they expand their real-time payments capability for consumers and businesses and how they connect to The Clearing House and/or the FedNow Service so they can launch a whole new generation of real-time payment capabilities.”  

Use cases grow when financial institutions partner with technology solution providers.  

“Here in the U.S., five years ago we launched the RTP network in order to provide true real-time payments all the way from the front-end customer experience to the back-end clearing and settlement,” said Keith Gray, Vice President of Strategic Partnerships at The Clearing House. “We have 300 banks and credit unions that are offering some form of real-time payments via RTP to their customers, receiving and sending as well in many cases. 

“That covers about 65% of the U.S. account base. If you’re a company using the network, you can reach about 65% of your customer base with a real-time payment right now. And that number continues to grow every week as we add new financial institutions through technology partners like Fiserv and many others. The types of use cases continue to grow and evolve. Things like same-day payroll, where you work your shift and get paid today, are a growing trend.”  

Gray also mentioned that Square and Elavon use the network to allow their merchants to instantly transfer money from merchant accounts into their bank accounts. 

As the use cases grow, the launch of the FedNow Service will help drive real-time payments toward ubiquity. 

“We still have a little bit of work to do to get to ubiquity, which would be when every individual or financial institution in the country has access to these new payment capabilities,” said Dan Gonzalez, Vice President of Customer Relations at The Federal Reserve. “But as we get ready to launch the FedNow Service this year, we’re excited about the possibilities it’s going to bring in connecting with every financial institution. So, while there are 300 [FIs] connected to RTP today, there’s still 9,000-plus financial institutions that we need to work to get connected to an instant payment system.”  

Gonzalez likened the rollout of the FedNow Service to passengers eagerly awaiting to board a plane.  

“We’re in the process of queuing everybody up and boarding participants onto the airplane,” he said. “We’ve got a number of service providers, and a number of financial institutions that are currently in the testing process. They’re exchanging messages through our network in a test format to get ready to go. We’re going to continue that for the next few months to get folks ready. 

“Once we have that airplane boarded, we’ll close that door for those first organizations, take them out onto the runway, get them taxied up and then ultimately launch that airplane later this summer. We’re excited about what’s coming and ultimately creating that path for a seamless experience to get more financial institutions connected to the network.”  

Gaming apps use real-time payments to enable money movement into and out of the apps. Although many real-time use cases are at the consumer level, soon the business-to-business (B2B) ecosystem will be benefitting from this capability.  

“The awareness factor has really leapfrogged over the past several years,” said Steve Murphy, Director of Commercial Payments at Javelin Strategy & Research. 

“If you went back to 2018 and I said to my kids, ‘I’m going to Zelle you some money for Christmas,’ they would have said, ‘What’s a Zelle?’ 

“And now that’s really at the tip of the tongue. Everybody knows that brand name.  I think that’s moving rapidly into the B2B space as well.”  

Instant payments are about more than just moving money quickly, and it’s not just financial institutions that stand to benefit. Consumers are top of mind when it comes to real-time payment use cases. It’s about getting the money they need, right away.  

“The initial benefits we’re seeing are for consumers because consumers don’t have the big lines of credit that businesses do,” said Ruhe of Fiserv. “So cash flow is super important, especially for getting paid. That’s why you see a lot of real-time use cases not just for person-to-person payments but claim payouts and gig economy payments because getting paid is really important.”  

“Consumers will benefit by having better visibility into their account balances and a greater understanding of when funds are available and usable to them,” said The Federal Reserve’s Gonzalez.  

The next strategy for increasing use cases will be serving small businesses. “As we talk to financial institutions, they’re developing roadmaps for capabilities for all their customers, for consumers, and businesses and small businesses, said Ruhe. 

“But I predict one of the next big focus areas will be on small businesses. Small businesses also have to have a careful eye on cash flow. Real-time payments definitely help with cash flow. We’re seeing a big push to help small businesses with that cash flow by enabling more real-time payments capabilities for them.”  

“Businesses will benefit by having better control over their funds, understanding or having the ability to pay invoices in real time, taking advantage of payment discounts, and having various opportunities to manage those funds in real time with greater visibility,” added Gonzalez.  

In a digital world, The Clearing House’s Gray noted, payments need to be faster, cheaper, and easier. 

“Another thing we hear from the banks on the network is that there’s a huge value in being able to get paid faster or pay faster,” Gray said. “The immediacy is a big deal. We call it RTP for a reason. If I owe a million bucks, I can wait until midnight tonight, I can hold it in my account to 11:59, and then I can send it. And especially in a rising-interest-rate type of an economy, that’s a thing that becomes a huge deal as well.”  

Said Ruhe, “It’s not just about real time. The money gets there instantly. There are two other important features. One is it’s guaranteed, it’s confirmed. If you hit send and you get the confirmation, you know it’s there. 

“But just as important is it’s 24×7 now. That’s not in the name. We don’t call it 24×7 payments. We call it real-time payments. We as consumers operate 24×7. If I have to wait till Monday for the payment to get there because I’m trying to send money on a Friday evening, that’s a problem. 

“Our digital world operates 24×7, and the legacy payment systems do not. These new real-time payment rails do. These payments work evenings and weekends, which is important.”  

To determine whether leveraging multiple real-time payment networks is possible, we must unpack the current capabilities of each platform and its role.  

“There are going to be two live real-time payment networks,” Gray said. “Both networks speak the same language, both are built on the same platform, ISO 20022. 

“I believe there will be some level of ubiquity across both networks. The networks will be able to talk to each other in some form. That’s the intent, anyway. The Fed is going live with the FedNow Service this year, and I’m sure we at The Clearing House will pick up those discussions down the road.  I don’t think it’ll ever work exactly like ACH does because of the nature of the networks. 

“ACH works in a batch process. We send files back and forth to the Fed. It’s a very straightforward process. And a bank just connects to one ACH network.” 

“With real-time payments, each transaction is processed individually within seconds. There is no concept of a batch. To get full ubiquity across the industry, you’re going to need to be connected to both networks, and you will need some type of routing capability like the Fiserv payment hub solution, as an example.”  

On that road to coveted ubiquity, financial institutions must first analyze their own goals.  

“Having ubiquity is going to be key, but there will be different ways for that to be facilitated,” The Federal Reserve’s Gonzalez said. “If one endpoint is on one network, that transaction would go to that rail. If it was on another, it would go to a different rail. I think it’s really going to be up to the financial institutions to look at their needs and see how those can be fulfilled by either network. A lot of that will be driven by the complexity of the organization, what their objectives are with real-time payments.”  

“There’s going to be a certain amount of overlap, but there won’t be 100% replication,” Mercator’s Murphy said. “Depending upon who the banks are trying to get to on the endpoints, they have to consider both networks.”  

Although a growing number of FIs can receive real-time payments, sending them requires additional capabilities.  

“Many FIs have started with enabling receipt of payments,” said Ruhe of Fiserv. “That doesn’t require any change to their user experience. They can just start getting payments and letting customers get paid faster.  

“Once they move to originating real-time payments, they must present some new capabilities to the user. They must change something they already do. If they have a digital payouts capability, they’re going to make changes to the service that they offer the customer for digital payouts. 

“If they are offering real-time transfers, they have to update the real-time transfers application, and that’s what their road maps really are taking into account. ‘How do I enable more of these send capabilities, a real-time bill payment capability, a real-time payables capability’? 

“Part of this is just working through the project backlog of making the changes to those applications to enable real-time. Because a real-time payment is not just a new standalone thing. A real-time payment is a new feature of a service you probably already offer.”  

The ability to both send and receive a real-time payment will quickly become a baseline expectation of a financial institution, Gonzalez noted, although send capabilities will be more challenging to acquire. 

“As these networks continue to grow and develop, and as we launch the FedNow Service later this year, the receiving capability is really going to be table stakes,” he said.  

“It is more challenging to implement the sending capabilities because of the interfaces and updates that need to be made. However, a lot of the technology providers and service providers are starting to ramp up their capabilities to send and make it easier for financial institutions to implement the send capability.  

“As we evolve and continue to grow the network, the process will become more streamlined and easier for those downstream financial institutions to be able to send for their customers.”  

Murphy offered a history lesson on how real-time capabilities have evolved. 

“Mercator did some research back in middle to late 2018 after The Clearing House RTP Network launched,” said Murphy. “We talked to eight of the larger financial institutions that were doing direct connects. 

“We asked about the challenges and how they were implementing. Most were doing receive first. A couple of them are doing receive and send simultaneously. When we asked them about the challenges from a technology standpoint, they were rating it about 5 to 6 out of 10. The larger concern was internal communications, the operational procedures that had to be in place to support sending. This is something that most of the institutions now will be looking at.”  

“A receive is a very easy pass for most FIs because technology providers like Fiserv can turn that on for you very easily,” The Clearing House’s Gray said. “Phase One has always been that we want to enable our customers to get paid faster. It’s a service they want, it’s a service they expect, and it creates a new deposit channel into the bank.  

“Now, it’s technology providers that most banks leverage. The vast majority of banks rely on a technology provider for their real-time payment-based connectivity and services. Each of those technology providers offered receive first. 

“Now they’ve all moved into or are moving into different send-based applications. Send is different than receive in that there are many use cases that are spend-based use cases where receive is one capability. You can’t just flip a switch and ‘turn on send’ because it could be a small business app, it could be a Treasury app, it could be a consumer app. 

“We see new use cases coming on board every day and most are being driven by a technology provider working with their banking relationship. It’s a technology provider that is providing a bank a service or an application they can turn on.”  

With many U.S. banks working toward providing real-time payments for customers and businesses, the innovation does not end here. New capabilities and solutions are in the works.  

Gonzalez of The Federal Reserve sees strong potential for merchant-focused offerings. 

“One large technology provider just made an announcement that its created a new platform to enable pay-by-bank for merchants,” Gonzalez said. “I do think the use of an instant payment or real-time payment network to facilitate  point-of-sale and other merchant transactions will come around. There’s been a lot of discussion in the industry about that capability as an alternative to some of the traditional payment methods. Pay-by-bank is one that I think is interesting and certainly worth the industry keeping an eye on.”  

Ruhe of Fiserv agrees and anticipates a focus on small businesses as well, adding, “A lot of the focus has been on consumers so far. At some point, the ability to use this in a merchant payment scenario will be coming. I think cross-border will be coming.  Small businesses have these same cash flow issues. They operate 24×7, and they’ve been largely underserved. Giving them the ability to pay and get paid instantly more often is going to be a big focus area of our industry in the next year.”  

Murphy of Mercator sees a strong use case in cross-border payments, “One of the things I’m hearing about is the potential for use for real time cross-border. There’s a lot of activity going on with the RTP Network, EBA clearing, and SWIFT. You might start seeing some of that during the latter portion of this year.”  

The Clearing House’s Gray outlines the broad benefits of real-time payments data, “Another thing we’re seeing is applications being developed that leverage the data capabilities of a real RTP Network payment, the ability to send information across the network as well as the actual payment. A corporate biller can send a request for payment that includes not only the request but the data associated with it (the invoice and the bill and where I want you to pay me). And that gets delivered to a small business or a consumer who can then make the decision to pay it now or pay it later.”   

FIs do not have to worry about the complexities of processing real-time payments. With Fiserv solutions, they can easily get connected to real-time networks. 

“We’re creating solutions that are very much turnkey solutions,” Ruhe said. “Solutions that you can consume as a service or as an infrastructure. It makes it easy to implement and turn on so that you can start processing real-time transactions. That’s certainly true for stage one of getting connected to these networks. 

“The next thing is we’re baking real-time capabilities into every other kind of processing service we have. You may have a business that wants to do digital disbursements, and we have a digital disbursement service that we sell through financial institutions and to large businesses. So we’re enabling real-time as a feature out of the gate so our clients don’t have to do a lot of heavy lifting. It’s a feature they can just turn on.  

“We’re baking support for real-time into solutions across the board, whether they’re consumer solutions, small-business solutions, FI connectivity solutions, or business payment solutions. Bake it in, make it easy, let’s make customers happy.”  

In the end, Fiserv is playing a key role in enabling consumers, FIs, and small businesses to fully benefit from all that real-time payments have to offer.  

In April 2023, Visa is set to update its requirements around reporting fraud, with the goal of reducing friendly fraud chargebacks and helping merchants retain more of their revenue. These new requirements, known as Compelling Evidence (CE) 3.0, let merchants bring evidence that contradicts cardholder fraud claims before chargebacks are filed. By sending in compelling evidence via Visa’s Order Insight platform, merchants can effectively block chargebacks from being initiated and prevent the advance of fraud claims.

CE 3.0 is based on the idea that if a cardholder previously made purchases that weren’t disputed from the same business, the current transaction that is being claimed as fraud really isn’t fraud. Under the new protocol, if a merchant can prove that the same customer data (such as device fingerprint and internet protocol, or IP, address) that are involved in a chargeback case are also associated with two previous transactions that were undisputed (with the same card and merchant), Visa will automatically deny the fraud claim. 

Furthermore, under the new guidelines, merchants can also submit this type of evidence after a chargeback has been initiated.  If a merchant responds to a chargeback in full compliance with the initiative guidelines, Visa guarantees the chargeback will be overturned. A ruling in the merchant’s favor will return revenue and reverse the original fraud claim.

A recent podcast hosted by PaymentsJournal sheds light on what the implementation of Visa CE 3.0 will mean for merchants, acquirers, and customers. Featured speakers in the podcast are Robert Painter, Sales Manager in the Dispute and Chargeback Management department at Kount, Domenic Cirone, VP of Acquirer Solutions at Midigator, and Brian Riley, Director of the Credit Advisory Service at Javelin Strategy & Research.

Before the update, merchants combatting fraud claims only had to provide one previous undisputed transaction, and it could come from any time. The new standards require providing two transactions, both being at least 120 days old. Companies that want to hit the ground running in April need to ensure they are collecting the customer information they need. The podcast, which was released on [ TBD  ], comes at a good time because it helps all parties understand how fraud claims will be resolved differently, and prepare accordingly.

Customers sometimes claim a transaction is fraudulent due to opaque billing information, general confusion, and lack of information. Sometimes they do so when there is a miscommunication about canceling a recurring payment. When a customer tries to cancel a subscription unsuccessfully and is billed for an additional few months, they can be tempting to call it fraud and have the issuing bank deal with it.

Such “friendly” fraud has become more common, partly because it has become much easier to file a fraud claim. “Back in the day, customers had to physically write to a billing dispute address, within 60 days on a credit card, and within 30 days for a debit card,” Cirone said. “Now, reporting fraud is easier to initiate. Customers are using the path of least resistance [to addressing unclear charges]. All they have to do is click on a checkbox that says this [payment] is unauthorized.”

Part of Visa’s new system is trying to differentiate between customer behaviors that have previously been treated the same way. The new Visa CE 3.0 initiative will enhance the taxonomy of fraud chargebacks, characterizing consumer disputes more exactly with a code for “I didn’t receive this” or “I canceled this three months ago, and they’re still billing me.”

“Visa has 28 different reason codes. A risk department can accurately analyze what the issue is with their merchant by seeing the individual reason code,” Cirone explained. “It’s a lot tougher with Mastercard because they only use four main codes. For example, Mastercard has a code which indicates a ‘consumer dispute.’ Well, what is it exactly? With Visa CE 3.0, the data will be more accurate.”

Improving the chargeback system will be helpful to acquirers, not just merchants. “Cleaning up that ecosystem of chargeback reason code so that we can start to define really what’s going on will be helpful,” Painter explained. “At the end of the day, the acquirer is really trying to keep their merchants in a position that they can grow their business and keep processing.” Having a more clear-cut fraud information system will help acquirers toward that. And, seeing as acquirers make money off every transaction they handle, the better the fraud transaction system, the more money they make.

These fraud developments will impact another group as well: fraud investigators. “The classification codes determine the workflow for [fraud investigators],” Riley noted. Having an improved fraud claim classification system, as well as weeding out claims in advance, will help banks focus their resources on the most egregious fraud claims.

“In the past, there used to be an adversarial relationship between merchants and financial institutions,” Riley said. “A lot of that’s changed. The financial institution wants the transaction because they’re going to make money from interest in the transaction. And the merchant certainly wants a sale. The realigning of interests is one of the reasons behind Visa enhancing its dispute process.”

As Visa CE 3.0 comes into play in April 2023, the future is bright. Merchants and acquiring banks should be thrilled and start planning their information collection systems so that they are ready to take advantage of the benefits of the program. Customers should be aware that less funny business is going to slip through when it comes to friendly fraud. But they may also be pleasantly surprised. Issuing banks will have more specific information about purchases to help confused customers make sense of their billing statements. It will all be interesting to watch next spring!

Many factors drive the need for more accurate, timely, and proactive liquidity management, including increased regulation and as the continued shift to faster payments.

During a recent PaymentsJournal webinar, Jo Wright, Director of Solution Enablement at Fiserv, and Steve Murphy, Director of Commercial Payments at Javelin Strategy & Research, spoke about the key ways banks can better manage their liquidity in 2023.

Banks are required to maintain a certain level of liquidity, which ensures that they can meet the demands of depositors, creditors, and regulators in times of financial stress. Amid moves to introduce further regulation, one key focus has been the development of Basel IV.

Basel IV has been developed by the Basel Committee on Banking Supervision, an international forum of central banks and regulators from around the world. It aims to improve the resilience of the banking sector by reducing the risk of financial crises.

According to Wright, implementation of Basel IV has been moved to Jan. 1, 2023[JE1] , with implementation taking place over a five-year period.

“That’s the timeline at the moment,” Wright said. “As we know, these timelines sometimes have delays. [But Basil IV] is meant to strengthen the international banking system and standardize the rules from country to country.”  

In today’s volatile and interconnected financial markets, banks need to be able to manage their liquidity in real time to minimize the risk of losses as well as adapt to a financial system that is increasingly dominated by real-time payments.

“Everything today is moving faster, including payments,” Wright said. “With the changes to the payments rails and movement towards immediate payments, banks aren’t working anymore with the restrictive cutoff times and waiting for next-day confirmation of settlements. They don’t have to wait for their statements, their closing statements, or their balances.

“The faster payments can be made, the faster liquidity and cash-balancing changes need to be visualized and monitored by the banks. This can allow interest debts to be settled and interests to be accumulated. This move to immediate payments requires 24/7 monitoring and the ability to know what is happening right now.”

Faster payments in domestic markets and, more recently, cross-border payments are driving the focus on liquidity. “All of the [real-time] systems that have been implemented so far have been domestic,” Murphy said. “But now we’re starting to see movement cross-border. So cross-border liquidity, which is where a lot of the high-value transfers happen, is also important.”

According to Wright, new initiatives in cross-border payments are being driven by SWIFT gpi and instant, cross-scheme integrations between Europe and the United States. SWIFT gpi (Global Payment Innovation) is a cross-border payment service offered by the Society for Worldwide Interbank Financial Telecommunication (SWIFT). The service uses such advanced technologies as distributed ledger technology and end-to-end tracking to enable faster and more efficient payments.

For banks, the upshot is a need to document liquidity in nostro accounts—those with foreign currency held by a bank in another country—more frequently than they used to. When a bank receives a payment in a foreign currency, it can credit the funds to its nostro account in that currency and use the funds to make payments to its customers or to other banks. In other words, it allows banks to do a cross-border payment without actually converting the currency.

“Traditionally, managing nostro account balances has been done overnight into day,” Wright said. “But with real-time schemes such as the SWIFT gpi, the ability to be able to move money and track money in real-time has made managing your liquidity that much more important.”

When banks know exactly how much money they have in their accounts in real time, they can better monetize that liquidity. “There’s the possibility, which banks have always done, to reduce idle cash and maximize positions,” Wright said. Essentially, banks can withdraw funds that are not needed for liquidity concerns and pay them out as dividends.

Another positive is the consolidation of transaction data from various systems within a bank and the visibility of all financials in one place. This data can be harnessed to help drive growth and profit for banks. “Real-time data can be used for trending analysis, to see where the peaks are,” Wright said. “There’s a competitive edge for banks to monitor their clients’ liquidity and trends and provide this information [and] solutions to clients.”

Better monitoring of liquidity also allows companies to forecast payments. “By tracking positions and trading information, banks can produce accurate real-time predictions of balances throughout the day,” Wright said. “That opens up a host of opportunities to the bank to then use that data to augment that payment processing. For example, a bank might manage liquidity during the day to optimize interest rates, making payment at the correct time to make the best use of fluctuating interest rates during the day.”

Wright recommends some concrete initial steps for banks looking to move toward real-time liquidity management. “The first step is to consolidate the movement of the funds in one in one place,” she said. “That doesn’t necessarily mean changing a payments engine or changing a liquidity system. It can be by augmenting the existing infrastructure with a funnel that puts all the information in and delivers it out in one coherent picture.

“The idea is to put all the transaction data on a single platform, thus enabling decision-making and actions that not only mitigate risk but optimize liquidity positions.”

The number of payment methods keeps expanding, driving a higher volume of payments and further complicating data management processes for businesses. The strength of any organization lies in its ability to efficiently manage data, and this is where automation would make the most significant impact.

An AutoRek report, “Payments Industry Outlook 2023,” highlights the findings of an organizational survey, identifying key challenges, priorities, and readiness for real-time payments in the ever-changing payments sector.

One of the top findings of the survey is the need for businesses to accommodate real-time payments. Aside from speed, the key benefits of real-time payments are that they are accompanied by critical data as well as reasons for exceptions.

“Modern consumers expect instant digital payments,” said Nicholas Botha, Global Payments Lead at AutoRek. “As such, real-time payments are set to become ubiquitous for both national and regional payments networks as authorities and central banks alike continue developing real-time infrastructure to accommodate consumer demand.” (Page 25 of the report)

Currently, real-time payment infrastructures can be found live in more than fifty markets, with more than twenty more to come.

“The focus on real-time payments in the U.S. is obviously becoming something that has not been previously looked at,” Botha said. “Whereas in regions like the UK and the EU, this has been a focus for some time. There has been a transition in focus for the next few years into that sort of real-time payments market, shifting attention from customer acquisition to more middle- and back-office focus.”

Botha continued: “What we try to understand through the reports is in terms of payment: where these organizations are depending on the size of their company, how they are managing certain core functions of their business to be effective in the payments market.”

Although many companies recognize the need for real-time payments, with over 85% of them being ready for the technology in less than 12 months, it is no easy task. The biggest bottleneck can be seen in most back-offices, which can be attributed to legacy infrastructures.

A significant imbalance can be seen in the way back-offices now work. Usually, they create batches of fund transfers that will be processed at pre-determined periods instead of in real-time. Therefore, reconciliations and settlements can take place only at the end of one or more intervals of processing.

As previously mentioned, the range of payments and volumes are expected to escalate, and the AutoRek survey shows that close to 48% of companies have not reached back-office scalability to accommodate this growth. This will certainly lead to a deflation of profit margins.

“There has been a large amount of scale that’s been happening in payments,” Botha said. “I don’t know if COVID was the reason for the scale in these payments and volumes or if it was just a catalyst to speed up to where we saw the market going. I think the latter.

“COVID expedited the process, all the technology, all the platforms have been there, there’s been new developments in payments infrastructure that’s happened relatively quickly off the back of COVID and the pandemic. There has been a dramatic increase since 2020 in payments organizations around the globe, and that’s a common trend across all the different participants in the survey.”

Of those surveyed, 58% agreed or strongly agreed that there will be an increase in payment methods. Among the U.S. segment, 69% expect an increase in payment methods, while only 48% in the UK expected the same. This high level of expectation in the United States makes the fintech companies worth watching to see what new and innovative payment methods may be coming.

Automation will be a key factor in significantly reducing the back-office costs incurred in managing the onslaught of payment volume.

It turns out that 25% of respondents had back-office systems with the capacity to scale. For these organizations, regardless of the increase in volume, back-office costs will remain the same.

Conversely, it was found that 22% of respondents experienced rising costs with the increase in volume. These organizations experience a drop in profit margins as payment volumes grow. Investing in back-office automation would be the answer for these situations.

“Automation helps with a number of different things for payments organizations,” Botha said. “What we do within automation of the internal processes in the middle and back-office helps shift a lot of FTE focus within a payments organization from your mundane preparation and data-handling tasks, like reconciliation and time-consuming activities.

“Automation helps shift that focus to more value-adding tasks in terms of analysis: how your product lines are performing, analysis of potential new product lines, how they could benefit them going forward. It’s about moving away from spending many hours a day, a week, a month on preparing cumbersome data that must be managed rather than investigated and analyzed to ultimately add value for the upstream.”

According to the survey, the size of the organization dictated the specific strategy that was prioritized and pursued.

“What we’ve found is that larger organizations typically have had a focus in the last two years on improving their middle and back-office, probably since they already have the market share, their revenue-generating product lines are performing well, and to remain on top, they’ve shifted their attention more to core middle and back-office functions. Automating their processes and creating more robust financial controls platforms will allow them to be more effective in maintaining and growing their market share,” Botha said.

“However, what we saw from respondents from smaller organizations is that, in the previous two years, they’ve remained focused on that custom acquisition, that revenue growth. In a different survey, post-COVID or during the pandemic, there were a lot of layoffs. Most were from the internal middle and back-office function, not in the front-office sales, revenue-generating roles being let off. That says the focus was primarily on customer acquisition, growth, and revenue growth to remain viable and operational.”

Botha offered more insight into how the responses were prompted and where the answers led.

“We asked these organizations the question: What will their outlook be for the next two years?” he said. “These organizations said they will split their focus strategically between revenue-generating activities, more product lines, and internally focusing on regulation, focusing on middle and back-office.

“But the smaller organizations who were predominantly focused on customer acquisition in the previous two years are actually looking at their internal platforms, specifically automation, focusing on governance, risk and compliance. Improving the operational systems they work with daily is seen as a way to build a more robust middle and bac-office over the next two years.”

“The more up-and-coming tech organizations, your PSPs, your fintechs, your insured techs, they were fundamentally focused in the previous two years on customer acquisition, and still remain very focused on that. But through the survey we see a lot of respondents saying the focus for upcoming or trends in the market for the upcoming two or three years is going to be really creating a robust controls process internally.”

Although customers worldwide are now inclined, more than ever, to benefit from real-time payments, there are myriad challenges to overcome.

On page 29, the report noted: “As the world becomes increasingly cashless, and e-commerce and international trade continue to expand, there has been a corresponding rise in the demand for cross-border payments. As of 2022, the value of cross-border transactions exceeds $155 trillion per year. But a borderless economy demands fast payments across territories in local currencies, which poses a sizeable challenge to payments firms with fragmented systems.”

“Whether we look at domestic or cross-border payments, we’re moving to a world where the underlying customers are expecting near-real-time settlements of their funds,” Botha said. “There’s several different players and intermediaries across different jurisdictions. They have different settlement times, and so it becomes difficult internally for organizations to offer that service effectively in a more manual world to their clients.”

Botha continued: “There are a couple of key points to consider. One of the main ones is there being trust (i.e., the customers know that this is going to be effective for them). No one really likes to move away from what they know works. However, in this transition, what real-time and domestic and cross-border payments means for these organizations, and ultimately customers, is that they expect real-time responses and settlements by the organizations managing their funds.”

Steve Murphy, Director of Commercial Payments at Javelin Strategy & Research, pointed to a coming merger of capabilities.

“There’s another innovation that’s right on the doorstep now, and that’s combining real-time systems with cross-border capabilities,” Murphy said. That’s something we’re going to start seeing perhaps as soon as this year from some private companies, and certainly we’ve got central bank digital currencies and central banks that are working with each other and that kind of thing as well.”

Although the United States is certainly ready for real-time payments, the report indicated that cross-border payments are more challenging to process.

Investment in automation might be what the doctor ordered when it comes to easing the strain of manual processes and other outdated, legacy systems. Botha said AutoRek has what companies need to free up more time to dedicate to the things that add value in running an organization.

“We are a financial data control platform, and we manage the end-to-end process in organizations,” he said. “Middle and back-office, whether it be in finance, treasury departments, payment operations, is a key element of where our platform is very successful.

“We automate three elements of the process, which add a huge value to these businesses. The first one being all your data management processes. With many different payment providers and partners working with many different banks, it creates a lot of complexity around your data management. We look after that and automate that process by giving all our clients back a lot of time in their day to shift that attention to more value-adding tasks instead of preparing data ultimately for reconciliations – the second and central part of our automation offering.

“AutoRek is a very flexible platform to meet a lot of their requirements around reconciliation. You can be as flexible and as deliberate as you need in the platform, which is beneficial to payment organizations. Payments organizations shouldn’t be told how they need to do things. They need to have something that adapts to their business models.”

Finally, Botha touted the centralization of reporting to satisfy regulatory requirements.

“The third element is having your audits all in one place and ultimately any type of reporting that you need from your management reporting, audit reporting, and even regulatory reporting,” he said. “We help reduce the potential of regulatory pressure and in some cases, fines as well.”