Preparing the Back Office for Instant Payments

As the 2023 launch of the Federal Reserve’s instant payment service approaches, banks and credit unions should carefully examine their readiness for faster payments. Waiting to prepare is not an option.

The Federal Reserve’s FedNow service will be the first new payment rail in the United States since the introduction of the Automated Clearing House (ACH) in the early 1970s. The government took the first steps to a real-time payments system nearly a decade ago. The Fed announced the 2023 launch in early 2021, with the interim period used for planning, testing and working out any issues during the pilot phase.

When FedNow launches, the U.S. will join nearly 60 other countries that already have real-time banking systems.

American consumers and businesses alike are looking forward to faster payments. They’ve largely ditched paper checks and embraced digital payments, including those offered through Venmo and Zelle. According to a 451 Research survey, 45.6 percent of consumers said they are likely to open anew account with a banking service provider that supports real-time payments. Among businesses, that number is even higher. A Federal Reserve survey of 2,010 U.S. businesses revealed that 90 percent want access to faster payments for their operations this year.

For financial institutions to meet this demand, adjustments to their current treasury and back-office operations will be necessary.

Eliminate Workflow Inefficiencies

Look for opportunities to automate workflows, especially inthe back office. Inefficiencies within internal operations may prevent banks and credit unions from delivering on the promise of real-time payments, which will drive businesses and consumers to financial institutions that can.

Many financial institutions are still operating in the past with legacy technologies and time-intensive processes. They often require their employees to memorize hundreds, if not thousands, of codes and manually reconcile, post and settle payments, along with other manual tasks, such as balancing accounts and compiling reports. One reason for these complex workflows is having multiple disparate systems for processing payments. For instance, a bank may use individual legacy systems to process transactions based on the payment type, such as ACH, wire and more.

However, a centralized payments platform can automate and simplify many of these processes, saving time and minimizing the risk of human error. With a centralized approach to payment processing, bank and credit union leaders can configure rules and define parameters for these various back-office workflows, including reconciliation and exception management, to name a few. For example, some financial institutions may opt to assign specific reconciliation processes for payments with certain transaction attributes.

Enhance Compliance, Risk Management Functions

Enhancing efficiencies and simplifying processes is also important for compliance and risk management functions when it comes to real-time payments. Concerns around risk management and fraud prevention are a major reason that the transition to real-time payments has taken so long in the U.S.

The good news is, a more cohesive payments strategy will give banks and credit unions a more robust and centralized view of real-time transaction data. By using one system to process payments, no matter how the payment was originated, financial institutions can consolidate transaction data from disparate sources into a central hub and view that data in real time to improve compliance, risk management, liquidity management, fraud detection and more.

For example, by integrating a centralized payment processing platform with a bank’s other systems, such as anti-money laundering and fraud detection tools, a bank can ensure all transactions are processed appropriately without sacrificing speed or being exposed to compliance or security risks.  

More Benefits Ahead

A central payment platform offers benefits beyond improved back-office efficiencies. Using a single payment platform, rather than multiple disjointed systems reduces costs, increases operational efficiencies, and supports faster processing for transactions. A unified payment platform also improves access to data and analytics. In the future, these benefits will help position financial institutions of all sizes to launch new payment offerings that their accountholders want while providing the best possible customer service.