New Payment Schemes Create A ‘Minefield’ Of Complexity For Banks

While FinTechs and innovators continue to disrupt the world’s payment systems at a dizzying pace, traditional banks have to stay on-board if they’re to compete and stay relevant. Faster payment schemes are only as valuable as they are accessible, so FIs have to quickly connect to emerging payment rails.

But that process is a headache, says Form3 Chief Product Officer Mike Walters.

“The options for a bank or financial institution to connect to existing payments schemes have been limited,” he recently told PYMNTS. “Connecting to payment schemes for banks has been a minefield of complexity, cost, and hidden limitations.”

According to Walters, there are two basic ways a financial institution will link into a payment scheme – each with its own drawbacks.

There’s the indirect way, in which FIs will deploy the services of SWIFT and the like. The tactic deploys a lot of proprietary technology, leading to reduced functionality, implementation challenges and the fact that often times, the mechanism by which a bank links into a payment scheme can only be used one time.

Then there’s the direct way, in which banks join as a member of a payment scheme via payment gateways. But this is expensive, warns Walters, and requires frequent updating and upkeep.

With more payment schemes emerging that can enable faster, same-day and even real-time transactions, on-boarding banks is becoming an even greater hurdle to clear.

“As these payment schemes have moved to the new, real-time norm, this means that availability and speed/latency have to be managed by the bank – not an easy task,” the executive explained, adding that, especially when a bank takes the direct connectivity approach to linking into a payment scheme, the burden of performance remains on the bank.

Form3, which launched only about a year ago, has explored these points of friction in an effort to reduce them. Most recently, the company inked a partnership with Apply Financial, using the latter’s APIs to achieve straight-through payment processing as Form3’s own API enables streamlined integration into payment schemes for its clients.

APIs are having a moment in the financial services industry, but according to Walters, “they’re not magic.”

“To most technologists, they have been used within infrastructures for years,” he explained. “Right now, what has historically been used for connectivity between applications and services within a single organization’s technology estate is now being used to connect different organizations together, and, critically, this is the model which can best support the explosion of development options brought about by public cloud providers.”

That combination of the cloud and API technology is key to the financial services and payments industry, he added, especially as demand to not only send funds, but to send information along with a payment, increases.

“This is huge,” he said of the benefits of the trend. “And we have only see the start of how this will evolve.”

Real-time payments presents a scenario in which the cloud and API technology can really flex their muscles, too.

Agility today is of utmost importance for a bank as consumers and businesses demand accelerated payments, greater visibility into transactions, more data and information moved, and a broader array of use-cases. Banks should think hard about how each payment scheme may meet all of those demands, said Walters.

“Each of the schemes achieve very different things–  it’s not just about movement of money, it’s about collateral management, speed, value, richness of information, certainty, currency, etc.” he said.

For example, Bacs may not offer the fastest transaction speeds, the scheme “remains the most cost-effective way to move value in the U.K. for payments, such as supplier and payroll,” according to Walters. Meanwhile the Faster Payments scheme offers immediate movement of funds, which, today, is a “must” for FIs to offer. CHAPS is critical to support many higher-value B2B payments, while checks, despite their reputation for being bulky and expensive, still play a vital role in corporate payments – especially as image-based clearing is on the way.

“It may be that the perception of some banks come back to checks for some types of payments, particularly for those users who have limited access to mobile technology for person-to-person payments,” Walters explained. “But this one really does depend on the types of corporates you are looking to try and serve.”

Each scheme plays its role, and it is unlikely a bank would be able to adequately meet all of the needs of its corporate customers without supporting all of these schemes. The combinations of matching client payment need to payment scheme are “broad,” he noted.

But FIs may decide they need a partner not only to more efficiently onboard themselves into these schemes, but to ensure transactions processed are secure, compliant and behaving as they should – especially as real-time payments volume grows.

“In all cases, fraud risks need to be mitigated and managed,” Walters noted, “and it is true that when you have payments running real-time 24-7, the approach to monitoring and managing fraud needs to be different than when you have days to identify offline a transaction and take action.”

With new payments technologies surfacing at eye-opening rates, technology within the banks has to keep up. That’s where even more innovation, like machine learning and behavioral analytics, can help FIs keep pace with managing fraud risks, the executive said. It’s certainly a challenge, and one that will knock the wind out of a bank’s innovation sails if they’re not agile and flexible to adapt. But, Walters added, what the effort on the part of banks, businesses and FinTechs amounts to is an impressive payments landscape.

“What I always find amazing in the U.K. is the breadth of established and sophisticated options that are open to businesses and banks,” he said. “It really is a market which sees innovation and convergence of card, account  transfers, alternative payments, mobile technology and cloud in financial services.”