COVID-19 drastically affected the global supply chain, and it quickly became apparent that we can only move as fast as money does. If it isn’t moving in real time, how do we make instantaneous decisions and create immediate impact?
The fast adoption of real-time payments in the United States and globally would be the single most beneficial thing in terms of spurring the economy, supporting small businesses, generating cash flow and creating liquidity. So, why haven’t banks embraced the platforms or networks that make this a reality?
Banking systems are siloed, and their technology, infrastructure and core platforms feed financial inequality. For example, international wire transfers or automated clearing house electronic bank transfers cause unexpected processing delays, and you may wait a week to receive your hard-earned cash due to a holiday or weekend.
The most irritating thing is that there are already systems and technologies for safe and secure open-banking application programming interfaces and real-time payments. But the rollout is tied to banks opening up and they are currently dragging their feet trying to figure out how to monetize modern payment methods. With the possibility of losing customers to new financial services providers, banks are seriously frustrating the global economy — and it shouldn’t be down to financial institutions to dictate how and when we get our money.
Real-time payments have many advantages over traditional payment instruments; they are cheaper and faster than checks and more convenient and transparent than cash. This means improved business outcomes, financial inclusion (in low- and high-income countries) and a reduced shadow economy.
Real-time payments can also serve as the underlying infrastructure for further services, products and innovative use cases developed by real-time payments providers or third parties.
However, only collective action and collaboration can enhance the adoption of real-time payments and make formal financial services more accessible. If financial institutions don’t participate or run closed systems, everyone loses out.
It can be a painful process for banks launching new products as they have to consider new regulations, competitors, technologies and the expectations of a generation of tech-savvy customers. According to a McKinsey study, a six-month time-to-market delay of any product could result in a 33% reduction in profits over five years, which would be a major loss for financial institutions.
This kind of delay triggers disruptions up and down the supply chain; in business to business (B2B) for supplier payments, in business to consumer (B2C) for insurance claims and employee wages, in consumer to business (C2B) at point of service or for bills, and in domestic and cross-border, peer-to-peer (P2P) payments to friends and family.
The network effect of the product and, therefore, payment delays mean that small businesses in particular are suffering from overdraft fees and hindered business growth. Now, merchants are looking to real-time payments to enhance their cash flow management, reduce fraud activity and provide incremental value to their customers since the banks — that are supposed to be providing a service — are not innovating.
The ironic thing is that today we already have the solutions — someone could send bitcoin in a matter of seconds or use a third party like Venmo or Cash App.
The Revised Payment Services Directive (PSD2) is a framework and set of laws for banks in the European Union aiming to make payments better, faster, safer and easier. Regulators wanted financial institutions to open up data to third parties through APIs to facilitate innovation, reduce payment delays and allow third parties to connect to many banks, not each bank’s proprietary technology.
While open banking has made considerable progress in Europe, its promise of interoperability through data-sharing has been challenged due to a lack of harmony in transaction processing between various European banks. Businesses still have to interpret each bank’s implementation of APIs — it’s time for a Pan-European standard.
When it comes to open banking, bigger financial institutions are attempting to take control by using their own standards to make real-time payments or open up APIs. The issue is that financial institutions want everything to be proprietary, and they can’t agree on a centralized standard.
Many banks talk the talk. They’ll say they are looking forward to embracing open-banking standards. Take Alex Yang, from Bank of America, who spoke about Afinis, a membership-based standards organization governed by the National Automated Clearing House Association, as a perfect opportunity to develop new communication standards for the financial industry. Or take FIS, a financial technology leader, partnering with The Clearing House to bring real-time payments to U.S. financial institutions. While these are ambitious promises, we are yet to see any drastic changes.
Even launching Zelle in 2017, an instant payment service, was challenging enough, but banks like JPMorgan Chase, Wells Fargo and Bank of America knew they needed to do something. Venmo and Square were eating their lunch in terms of peer-to-peer payments.
Without standardization across financial institutions or a singular interoperable standard domestically or globally, it is impossible for third parties or other integrators to understand how to prepare for development. Banks are simply not adopting real-time payments and open banking as fast as they should and are therefore frustrating the abilities of third-party platforms to move new technologies into the market.
Fintechs offering payments solutions for financial inclusion are attempting to build future payment networks. But this is intimately connected to banks opening up their payments systems, and their stubbornness makes it impossible for fintechs to operate.
Several leaders from financial institutions, such as JPMorgan CEO Jamie Dimon, are feeling the heat and turning to speak ill of fintech real-time payment solutions like Trustly and Plaid, calling them “unfair competition.” Many banks suggest that fintechs are dangerous due to using screen scraping and crawling APIs to collect customers’ bank logins and execute some functions.
The thing is, if you want to pay from a bank account directly to a merchant, it will currently take three days without these vital third-party intermediaries. Companies like Plaid are looking for simple integrations to have a tokenization process for joint cooperation between financial institutions and innovative solutions that already exist in the market. Ultimately, banks are still paying lip service to the industry without actively developing a solution.
