How bank tech must change for the future of payments
U.S. banks are trying to answer a key question about open banking: Can we share our data with payment companies and other fintechs without scrapping our legacy systems?
The answer is yes, with an asterisk.
The dawn of open banking has created an environment wherein banks are more open to share data and move toward API-based and cloud technology that serves multiple purposes. U.S. Bank, JPMorgan Chase, Citigroup and Wells Fargo have moved the dial on this trend, establishing data-sharing pacts with various fintechs providing verification software, financial planning tools, document aggregation and other services.
At the same time, banks have found that — with or without the fintechs to help them — they are increasingly replacing their older systems with digital-focused ones that support services such as real-time payments.
It's not impossible for a bank or business preparing for the maturing of real-time payments to take an approach that could prepare parts of their networks to accept the new technology, and then add onto the new rails as needed.
"Depending on what Band-Aids were created, sure, that strategy could work," said Erika Baumann, senior wholesale banking analyst for Aite Group. "The goal here is to make sure the infrastructure is flexible and able to adapt to whatever comes next."
Coming to America
There's a reason the open banking concept has taken hold in Europe, through its revised Payment Services Directive (PSD2) and is making its way into North America — banks and businesses need the foundation to be ready for whatever innovations will follow.
"The object is to make sure the architecture is as open as possible and running in an always-on environment," Baumann said. "There is certainly the opportunity to utilize some existing components without having to rip-and-replace everything, but the key here is to understand the limits of existing infrastructure and integration."
To that end, various fintechs and payments providers are seeking to make that transition as easy as possible for clients by introducing APIs that can deliver most any service that legacy systems either can't handle or are currently providing in a costly, cumbersome manner.
"In today's payments space, everything is moving toward real-time payments," said John Mitchell, CEO of Episode Six, a provider of "next generation" payments and financial services technology through a series of APIs. "To be able to facilitate this RTP movement, the infrastructure has to be able to allow for all of the added capabilities and services, including artificial intelligence and machine learning."
In short, to take advantage of new technology, the system infrastructure has to allow the digitizing of the services already in the banking space, Mitchell said. "Banks are moving toward these capabilities, but it's a big effort and it takes a lot of partners with the ability to present the technology and ways to use that are best for customers."
The tactic of moving slowly without abandoning legacy systems will work as adjustments are made to service areas in which changes are needed quickly, but there are some risks involved.
"You really have to be cautious to make sure you are not just papering over cracks," Mitchell said. "That might have some immediate benefits, but it is not going to have a long-term benefit that everyone wants."
Episode Six offers a platform of more than 600 APIs to support e-wallets, P2P payments, crypto conversion, prepaid, debit and money transfers. It also provides apps for fraud prevention, customer service, data management, fee creation, compliance management and other services.
The question of whether to simply add a few applications for new services, or to completely overhaul a legacy system and be prepared for the future, falls in line with what the banking and payments industry is seeing globally.
Planet of the APIs
Companies like Ripple with its crypto currency and blockchain model are forcing banks to ponder considerable overhauls. The Swift messaging agency has turned to its Global Payments Innovation initiative, which essentially standardizes processes, messaging and technology advancements in a manner in which all banks in the network are essentially using legacy systems in the same way and preparing for tech advancements at the same time. More recently, Swift has connected GPI to domestic faster payments networks in Europe and Asia.
"We see a lot of banks in Europe building translators so they can accept the ISO 20022 messaging standard, and that is great," Mitchell said of the standard that adds rich data to transactions. "But is it really going to give you the resiliency you want over time, or the scalability? Or is it just another system that is not fully integrated that has to be maintained and serviced?"
When a bank or business is operating an infrastructure with flexible APIs, they can create consumer products "that are based on the demands of their consumer base," Mitchell added. "It's a big pivot and shift to do that, instead of building products based on the restrictions around your technology."
Various companies have been traveling a path to bring speed, security and ease of adoption to new technologies to the banking industry and its customers. In many cases, it is just a matter of converting an old process into a digital experience.
And they encounter banks at various levels of technology awareness and savvy, thus the question of what to do next is almost always handled on case-by-case basis.
"In most cases, banks are using multiple systems, some of them core legacy and others that may or may not be integrated with those legacy systems," said Richard McShirley, chief marketing officer for California-based linked2pay, a cloud-based financial technology provider. "Some of those systems are server-side and others are cloud-based."
Linked2pay has found itself in a good position to monitor banks' movements toward cloud-based technology, offering a plug-and-play setup for payments, underwriting, onboarding, risk management and same-day ACH. It can operate via API or through a platform portal.
"Most banks move slowly, but the buzz around and demand for real-time payments is finding a number of applications that banks can't afford to ignore," McShirley said. "Examples of services evolving out of real-time payment tech include instant merchant settlements, instant payroll solutions and many others."
The introduction of real-time payments and its technology connecting into so many other financial services has opened the door for businesses to also take a far more serious look at B2B payment technology.
Ultimately, the goal of most tech providers in the B2B space is to deliver software that will help banks eliminate the friction in B2B payments to the point they operate in a similar fashion to consumers' real-time P2P payments or those initiated at a retail POS.
"We have seen a serious uptick in interest and adoption in the B2B space as more companies realize they have more options to automate processes like accounts receivable and accounts payable," McShirley added. "Digital invoicing is an area of great interest because a well-designed solution for this standard business function converts a slow-moving paper option into a real-time payments connection between the biller and consumer."
The same methodology would apply to bank account payments. Vancouver-based VoPay announced a partnership this week with data services company Flink to utilize open banking technology to authenticate bank account payments instantly like a credit card.
The VoPay APIs allow online businesses to accept and manage payments directly from a bank account, which, in turn, enables consumers to make e-commerce payments online directly from those accounts rather than making card payments.
It serves as another example of how bank infrastructure has to prepare for any technology that comes down the pike seeking ways to make payments faster and easier for businesses and their customers.
And the notion that the hundreds of thousands of transactions moving through legacy systems now will suffice in the future as well, could easily backfire.
"If those banks (reluctant to change) are moving to real-time," then waiting "is a strategy that won't work," Aite's Baumann said. "For sure, there are still banks that have not bought into the need for real-time payments, but those numbers are shrinking for a variety of reasons."