Instant settlement is expected to get a jolt in the coming year as FedNow becomes a new real-time payment option alongside The Clearing House's RTP network, but it's widely expected that most transactions will not need to occur as fast.
This creates an opportunity for technology to help determine when a specific payment needs to use the express lane — and pay the toll that comes along with it.
"Some businesses have higher margins and can use a higher-cost payment method. Some have lower margins and don't always need real-time payments," said Dave Glaser, president and COO of the payments company Dwolla.
The solution could be payments orchestration, or smart routing, which refers to a process of selecting how to route a transaction based on a mix of processing time, cost and user experience. Real-time payments adds another option, joining checks, wire transfers, P2P and B2B apps, cards and mobile wallets. Payment companies and banks are considering how to update their ability to choose the right processing option to attain the best outcome.
Dwolla does not currently automate payment orchestration, but designs payment routing protocols and processes as it onboards businesses through its application programming interfaces. Its APIs embed with the RTP network. It has also worked with FedNow through pilot testing and plans to support payment routing via FedNow, along with other options such as same-day ACH transfers. The company accumulates data on a firm's fund flows on different days and times and suggests a payment method automatically when that firm is set to pay a bill or other expense.
In an interview for an upcoming American Banker Magazine article on real-time payments, U.S. Bank executives detailed a strategy designed to automatically route payments over the rail that best fits that transaction — FedNow, RTP or another option. Payment technology firm ACI Worldwide offers a similar service.
Dwolla's API approach helps inform decisions on which payments should be processed in real time and which do not need to settle that quickly. As more data comes in for real-time payments, Dwolla plans to add more automation to these decision tools.
"How do you know which payment type is right for you at which time?" Glaser said. "That's what we're trying to find out."
While cost is one of the more common reasons for choosing a specific option for a transaction, the expense issue is complicated.
What's different is the amount of technology work required for banks to support real-time payments, including security and processing upgrades required for payments that settle instantly at all times. Real-time payments need technology that's more advanced than batch processing and banks may wish to right-size what parts of their payment business they update for real-time payments.
And the limits on real-time payments disqualify larger transactions, particularly for B2B payments. That will likely lead financial institutions to use real-time processing for specific-use cases, and set fees for real-time pay as a premium service.
In an earlier interview,
"The focus currently is to make it simpler for clients to make payments because the marketplace is getting more complex, and some might say fragmented," said Gareth Lodge, a senior payments analyst at Celent. "Clients shouldn't need to know who is accessible via which payment method."
Smart routing can be a part of solving this challenge, Lodge said. Clients set attributes such as cost, speed and other factors, then the bank routes based on those parameters. "This is particularly key when the U.S. has at least three real-time rails, none of which have ubiquity," Lodge said.
Payments orchestration is based on the broader concept of workflow orchestration. That refers to using automation to manage a business process that touches a number of parties — in this case banks, merchants, consumers, business customers and different payment networks.
The strategy started to take hold in the payments industry several years ago, as companies started
Many U.S. financial institutions have significant legacy "technology debt," meaning their current systems cannot keep up with the pace of modernization required and exhaust what little budget there is for innovation due to the expense of upkeep, said Carrie Connor Blankenship, payments innovation principal at Volante.
"One way to address this challenge is to focus on payments orchestration rather than processing, and modernize 'from the outside in,'" Blankenship said.
Orchestration provides the best payment options available based on business need, whether that's fastest or cheapest routing, or customer and account preferences, Blankenship said.
Payments come to financial institutions in different formats and standards, potentially complicating identification, validation and routing. Orchestration adds ISO 20022 — the messaging standard for instant settlement — to existing payment options, to decide in real time which payment option to use based on a user's business rules.
"Similar to sending a package via Federal Express, the sender indicates when the payment must arrive, and has the choice to route that payment based on cost or speed," Blankenship said.
