Real-Time Business-to-Business Payments Will Fundamentally Alter the Banking Landscape: ISG

ISG expert discusses the impact of commercial-scale real-time payments during American Banker virtual event

Platforms for enabling real-time, commercial-scale payments between enterprises will fundamentally alter the banking and financial services industry and present technology and workforce challenges for enterprises, an expert with Information Services Group, a leading global technology research and advisory firm, said .

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“Similarly, real-time payments between enterprises, which are initiated and settled instantaneously and permanently, will offer improved business liquidity, visibility and cash flow management and the possibility of reducing or even eliminating interchange fees.”

In a virtual panel discussion, “How real-time payments enable new customer experiences and drive growth for financial institutions,” hosted by American Banker, Jay Woldar, director, banking and financial services with ISG, said enterprises will need to address the new systems’ operational, technology and people requirements before reaping the benefits.

“Consumers are quickly turning to real-time payments between individuals as a seamless replacement for cash or checks,” Woldar said. “Similarly, real-time payments between enterprises, which are initiated and settled instantaneously and permanently, will offer improved business liquidity, visibility and cash flow management and the possibility of reducing or even eliminating interchange fees.”

Emerging real-time payment platforms promise to increase security by conforming to ISO 20022, which enables financial institutions to send rich data sets with each transaction. The platforms also eliminate payment reversals and returns and deliver secure communications, multi-factor authorization, device binding and confirmation mechanisms, and more secure payment options through verified channels.

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Despite these benefits, Woldar said most enterprises are still using ACH and wire transfer. ACH transfers take at least one business day, are not available on weekends or holidays, and require banks and companies to withhold funds to offset risk while funds are in motion, making money movement costlier and more expensive. Wire transfers are faster but are also more expensive.

“Adding a new payment system may sound like an easy decision, but the scale of the change disrupts ongoing bank operations and requires a significant investment in technology and security,” he said. “As with businesses of all types, banks and non-bank financial institutions are struggling to find the personnel and technical expertise to execute this strategic initiative.”

As the U.S. government prepares to launch the FedNow system in mid-2023, the lure of real-time, business-to-business payments will grow stronger, Woldar said. FedNow will be available to depository institutions in the U.S. and will allow them to build value-added services on the real-time payment capability.

“Demand will change in the coming years as more fintechs and competitor banks offer real-time payment capabilities,” Woldar said. “If a bank decides to wait on building a real-time payment solution, it may miss out.”

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