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Hesitating on real-time payments will come back to bite banks

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The U.S. payments industry is undoubtedly ripe for change. Before the unprecedented shock of COVID-19, digitization and payments transformation initiatives had been organic, piecemeal and predominately the preserve of the largest banks.

Now, increasing pressure means that financial institutions of all sizes are working to define a digital strategy to unlock new opportunities, drive business value, and stay competitive. But beyond the immediate impact of COVID, what underlying trends are accelerating digitization in the U.S.?

Real-time payments have been met with a degree of caution by U.S. financial institutions. Risking traditional profit generators in return for potential revenues down the line is a gamble many have not been willing to take. But immediate payments are coming to the U.S. whether banks like it or not.

Major payments infrastructure providers, including Nacha and The Clearing House (TCH), have moved to encourage immediate payment adoption in recent years. But the Fed, frustrated with a slow rate of progress, has announced that it is pressing ahead with the implementation of its FedNow system (despite significant industry objection). Although the Fed’s true intentions are open to interpretation and this may just be a play to accelerate private initiatives, it is a clear signal that they mean business.

This means holdouts risk their own Kodak moment if they miss the huge opportunities in front of them by fixating on traditional revenue streams. Banks are in a position to support innovation across entire industries such as health care, which could be released from the constraints of paper-based bureaucracy and slow, expensive transactions.

Another opportunity that can be unlocked via instant payments is ISO 20022 (used in the TCH RTP system). It is the future of payments messaging standards and can greatly enhance various payments processes through increased data-carrying capabilities. More important given the current climate, citizens reliant on federal or state support can benefit from RTPs combined with additional data to immediately access emergency funds.

The U.S. is getting older. Consumers who were 10 when the iPhone first launched are now 23. This means we are seeing a ramp-up of digitally native Gen Z consumers (roughly those born between 1995 and 2010) accessing banking services.

Demographics are an inexact science and imperfect predictors (there are technophobe college students and 100-year-old Instagram influencers), but we can detect noticeable trends.

Younger customers don’t usually choose a bank because there is an ATM in their neighborhood, a slightly better interest rate or an ad in the newspaper. Rather, a strong digital presence, personalized tools, rewards and experiences, and the trusted recommendations of friends and family, will have a more significant impact on customer acquisition.

Banks must look at the effect this will have on their longer-term digitalization strategy and be able to segment what this emerging customer base might want and how they will interact in years to come.

Corporate treasurers are people and their experience of seamless, immediate payments in their personal lives shapes expectations in the workplace. Although check usage for business-to-business (B2B) transactions is still within the norm in the U.S. and barriers to change remain, corporates are increasingly demanding the ability to transact in a real-time, omnichannel environment, 24/7.

The benefits are clear. Corporate treasurers stand to enjoy enhanced liquidity management and transparency, greater control over payments and enhanced data for reconciliation purposes. And for consumers, alternative digital payment options such as buy now, pay later promote choice and flexibility.

A significant consequence of emerging consumer and business demand for digital offerings is the increase in competition from fintechs, technology giants and other third parties. Traditionally, incumbent banks have enjoyed the advantage of consumer trust to offset more limited innovation. But as consumers become more comfortable entrusting their financial transactions to nonbanks, banks must differentiate and digitize to remain competitive.

Data is where the technology giants excel, and their ability to personalize experiences and emotionally connect with their users is unprecedented. Banks need to learn from the positive aspects of this model to better understand their users and deliver meaningful, useful products and services.

For data to become the cornerstone of a bank's customer relationship and take services to the next level, breaking the channel silos and extracting value from a comprehensive dataset will be decisive. But with only 18% of banks reporting that they are in the process of shifting from a transactional revenue model to a data-driven revenue model, this work has some way to go.

Customers now expect services that work for them, not their banks. All banks, no matter the footprint, need to move quickly to offer a broad digital service platform that adds value to both the customer and the bank.

By defining a robust payments transformation strategy, banks of all sizes can remain fiercely competitive by rapidly lowering costs, unlocking revenues and promoting innovation.

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Real-time payments Payment processing Banking Digital payments
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