We live in a fast-paced world. Feeling hungry? Press a few buttons on a screen, and you’ll have food in less than an hour. Planning a vacation? You can research destinations, check the weather anywhere in the world, schedule a flight, and order an Uber to take you to the airport—all without leaving your couch.
In an age when everything seems to be just a click away, why are we still waiting for funds to clear for something we purchased a couple of days ago? In this blog post, I’d like to discuss how adopting a real-time payment system can help your financial institution keep up with the fast pace of modern consumers.
What is a real-time payment system?
I’d first like to define what a real-time payment system is. It means that the payment and settlement service will incorporate clearing functionality into the process of settling each payment so that the funds are available immediately. This allows financial institutions to exchange the information needed to make the debits and credits post to their consumers’ accounts and notify them of completed or failed payments.
Real-time payment has a very specific definition—it’s irrevocable and it’s final. Basically, the movement of money happens effectively at the same time as an authorization. So, if I say, make a payment, it cannot be reversed or stopped. It's also known as immediate payments.
Faster payments can be defined more broadly. It’s how quickly money is moved from one point to the other once you have put it into motion by making a purchase, paying a bill, or otherwise moving money between accounts. The Automated Clearing House’s Same-Day ACH is an example of a step toward faster payments. Same-day deposit for checks is another example of faster payments.
Ironically, I think a lot of small businesses and consumers today think they are making real-time payments using a credit card or debit card, but in a lot of cases, those payments really aren’t made in real time. Even in most peer-to-peer scenarios, there is a digital wallet tool that holds the payments or the funds before it gets dispersed into individuals’ accounts.
Adapting to changes in FinTech is an ongoing challenge for financial institutions, but failing to keep up can mean sacrificing business. Meeting the demand for real-time transactions will help your institution keep pace with today’s consumer expectations. If your institution is interested in adopting a real-time payment system, you’ll need to consider the following:
First, your institution will need an effective risk management strategy. How are you going to think about and fight fraud in a real time environment, because once the money is sent to a fraudulent player posing as your financial institution, it can’t be recovered.
You’ll need an effective communication strategy to let your account holders know this function is available. You will also need to alert all parties involved (both financial institutions and both people involved in the transaction) that money was transferred at the time of transaction. You’ll want to let them know that the transaction was successful, and if not, why.
The third consideration for financial intuitions is obtaining a sophisticated liquidity management or cash flow forecast. If you think about it, with the need to have and manage your reserve balance, you will need to be more predictive with your data and have an increased ability to understand and forecast what’s going on in a real-time environment.
If your institution allows borrowers to make real-time payments and accomplish their financial tasks from their devices anytime, they'll have no reason to take their business elsewhere. Capitalize on this now to grow your existing relationships and make sure your financial institution is top of mind for new prospective account holders!
James Patrick is head of Risk Products at SWBC, and is leading the effort to bring to market a new portfolio of solutions that protect clients in a complex, evolving world. Prior to joining SWBC, James was in charge of digital experiences for the full customer lifecycle at a Fortune 100 insurance company. James also served as a Green Beret in the U.S. Army and founded a terrorism risk software company in Austin, Texas.
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