Three keys to a digital payments strategy

Now is the time for financial institutions to embrace digital payments

 

The future of payments is still taking shape, but one thing is clear: the adoption and growth of digital payments will continue to accelerate.

At our Forum client conference, I hosted two of the smartest people focused on financial institution payments trends to give our clients insights into how they can respond for their institution, consumers and business customers. Joining me were Brian Riley, Co-Head of Payments and Director of Credit Advisory, Javelin Strategy & Research, and Aaron Press, Research Director, Worldwide Payment Strategies, IDC Insights.

Here are three key points distilled from our session, which are actions financial institutions can consider taking to support their digital payments strategy.

 

1. Elevate real-time payments

A digital payment is defined as the transfer of value from one account to another using a digital channel or device. Digital payments include digital commerce, mobile point of sale, direct debit, pay-by-bank, credit and debit cards, and virtual and prepaid cards.

According to Riley from Javelin, the value of global digitized payments in 2023 is expected to be $10.3 trillion, or 10% of global gross domestic product (GDP). By 2030, global digitized payments are forecast to reach $22 trillion, or nearly 18% of global GDP.

 

Real-time payments are digital payments, but they are a special category of digital payment. True real-time payments must be made between bank accounts and initiated, cleared and settled within seconds, around the clock, 365 days a year.

With the launch of the FedNow^® Service in July, the time may be right for financial institutions to connect to the growing number of real-time networks (including the RTP^® Network from The Clearing House) and make the most of those connections.

Financial institutions are already investing heavily in payments, and especially real-time payments. Payments as a whole is the second-fastest growing category of bank IT spend (behind commercial lending), said Press from IDC. Within the payments category, real-time payments is the fastest growing segment at 12.7% compound annual growth rate (CAGR), according to the IDC Worldwide Banking IT Spending Guide, 2023.

And it’s not just the large financial institutions investing in real-time payments. Tier 2 and Tier 3 banks are growing their real-time spend even faster than Tier 1 banks at 13.2% (versus 12.4%) CAGR, according to the IDC Spending Guide.

There are many use cases for real-time payments. For instance, consumers and small businesses alike increasingly expect real-time funds availability, instant credit for bill payments, commercial payments and account-to-account transfers.

 

2. Offer more for small businesses

The small-business segment is crucial for community banks and credit unions. There’s a gap in servicing that segment with a cohesive, integrated payments solution, but institutions with the right focus and strategy will be better positioned to close that gap.

Riley explained, “When Tier 2 and Tier 3 banks think about defending their local markets, they absolutely should not overlook the small business segment. There is a lot of spend there, and remittances are especially important. There are so many local businesses that have great revenue with payables and receivables that need to be processed.”

Don’t miss out on revenue opportunities – both now and in the future – by not adequately addressing the small-business segment. After all, the typical small business may get loans and a demand deposit account from their local bank, but it may be going elsewhere for the many other services it needs, including faster payments, electronic invoicing, money management tools, expense management, cash flow forecasting and accounts payable and receivable. 

3. Take a platform-based approach

The cost of managing and staffing new payments initiatives and rails is a top concern for many financial institutions. Consolidating support for multiple payment rails onto a single platform can help drive down costs, reduce maintenance and provide a better customer experience.

We’ve seen an increasing number of clients adopting a platform-based approach to build their real-time payments infrastructure. These clients tell us they appreciate the fact that they can integrate digital payments capabilities once and then use that foundation to add services.

Many of the institutions we work with plan to use customer data to engage accountholders more fully and offer better-targeted services. Understanding and using that data requires a payments platform that supports data normalization across all channels and touchpoints. When data is normalized – with context for how it was created and used – it may become value-generating information that may help financial institutions manage liquidity, offer new services and expand their customer base.

 

Future of payments

Having the right digital payments strategy is crucial to the success of financial institutions both today and in the future. Financial institutions, fintechs and their partners are laser-focused on bringing new solutions to market that help people and businesses pay, get paid and manage money in new and better ways.