Fast, convenient payment methods have become the norm for personal banking. It's no wonder businesses expect the same benefits for their commercial payments.
In August, the Federal Reserve announced plans to develop a 24/7 real-time payment and settlement service. The FedNowSM Service would support faster payments through a nationwide infrastructure.
Although the Fed anticipates the service won't be available until 2024, financial institutions are weighing its effect on payments strategies, including real-time capabilities. Specifically, how can financial institutions help companies adopt technology to match the flexibility and speed of consumer payments while balancing regulatory requirements, growing fraud concerns, and steep operational and technical challenges?
Of course, current commercial payment methods aren't broken. And the truth is, most companies aren't aching to release cash sooner. Businesses typically want to keep funds as long as possible, either to retain control or to use for cash flow.
But that must be balanced with a response to the demand for better, faster commercial payments, which is a byproduct of increased digital engagement on the consumer side. People are more comfortable with technology and electronic payments than ever before. Recent Fiserv research found 65 percent of consumers had paid a bill online through a financial organization in the past 30 days. Experiences with personal payment tools and capabilities have piqued interest and highlighted other options.
Financial institutions can make changes to benefit commercial payment channels today while preparing companies for emerging solutions, including real-time payments.
It's up to banks and credit unions to advance the payments process for their commercial customers and members. Financial institutions can make changes to benefit commercial payment channels today while preparing companies for emerging solutions, including real-time payments.
Education Before Modernization
There are many payment channels for businesses to choose from, including paper-based checks, automatic clearing house (ACH) transfers and wire transfers. Even with the Federal Reserve's investment in real-time payments, none of those options will be eliminated by a new payment method. There remains valid use cases and scenarios for each payment channel. And every payment isn't appropriate for every channel.
Financial institutions can educate commercial customers about the differences between payment types before any products or processes are refined. With a better understanding of the features and benefits, businesses can choose the most appropriate channel for every payment.
Most commercial payment needs can be matched to existing payment solutions. Many of the benefits promised by real time already exist. For example, data-rich options are available through ACH, and immediate transfers can be completed through wire.
That's not to say current payment methods are perfect. There's room for improvement in every channel. Commercial customers can provide guidance on where innovation is most desired. Payments innovation, including real-time capabilities, provides an opportunity for financial institutions to engage with their commercial customers and learn about their needs.
Financial institutions may want to prioritize improvements that have compounding payoffs, looking for modernization projects that provide both immediate and future benefits.
These three focus areas typically achieve that objective:
1. Information Flow
Businesses want immediate access to their money. And they want information about their money just as quickly. Information is valuable to businesses because it can be applied toward better decision making and reporting while also helping to detect and prevent fraud.
Once commercial customers have clear expectations about processing times and payment applications, financial institutions can add value by improving the speed and accessibility of information. ACH payments, for example, carry a large quantity of data. But that data requires significant back-office reconciliation because in many cases it is not structured. Confirmation of a payment's arrival or advance notification that a payment is going to be returned are two types of information that would increase value for commercial payers.
Greater transparency with payment tracking would also reinforce the value financial institutions provide to commercial customers. Providing businesses with more insight into the payments status could result in quicker decisions and information-sharing with trading partners.
2. Efficient Infrastructure
At the consumer level, transactions happen faster – and typically for free. Although those may be unrealistic expectations to carry into the commercial payments world, many businesses will expect those same financial freedoms and low-cost options.
Operational efficiency will be critical to the profitability of real-time payments because the business and pricing models are still unknown. Many financial institutions assume that fees for real time will be between those for ACH and wire transfers. Without efficient operations, the business case for real time – and future channels – is difficult to justify, even though commercial customers may demand it.
Deciding how commercial payment products will be defined is the first step because it affects both systems and processes. Issues such as fraud prevention and staffing also need to be addressed for real-time payments. The core infrastructure at most financial institutions is not designed for a 24/7 model. Operational downtimes also need to be accounted for.
So why wait? Infrastructure rationalization for real-time payments may unlock efficiency gains that can be achieved now. By addressing complex infrastructure needs early, financial institutions may even uncover competitive advantages. Infrastructure work to accommodate faster fraud prevention for real-time payments, for example, could benefit existing payment channels.
3. Ease of Doing Business
Checks have maintained their relevance among commercial customers for a variety of reasons. Limited payee information is needed to process a payment, processing fees are relatively low, and there's a clear paper trail documenting the transaction.
As an industry, financial services can advance other commercial payment options by making them easier to use. Wire transfers are still manual in nature, and both wire transfers and ACH payments are limited by cutoff timelines that favor businesses on the East Coast.
Those problems will need to be resolved to support real-time payments, which is a strong argument for starting now. In a complex business environment, making something easy has great value.
As they talk to commercial customers, financial institutions should look for pain points and common service issues. If those problems aren't addressed in today's payment channels, there's a greater chance they'll remain in future products.
Change Is Constant
Businesses need to move money easily and efficiently while meeting regulatory requirements and defending against evolving security threats.
Payments will always need to get to the right person, quickly and with the right information. And technology will continue to change the commercial payments landscape. Fintechs and consumer banking trends will rapidly push the industry toward endless new possibilities and capabilities. Financial institutions can work to engage commercial customers now to ensure their needs – not the technology – are central to modernization strategies.