The shift to real-time payments is fast a approaching, and banks and other financial institutions must start making significant changes in preparation for the shift, otherwise whey will find themselves woefully unprepared and losing to other banks that will take advantage of being one of the first to implement the changes.
But just what is real-time payments? According to an article by Gordon Smith in Digital Transactions, the term “refers to the instantaneous validation, acknowledgement, and transmission of transaction data between the point of sale and the biller’s system. Different from ‘near real time,’ which refers to expedited batches that may range from minutes apart to an hour or even more, real time is truly instantaneous processing.” Basically, that means the funds that get transferred are available in the recipient’s account immediately – in real time. Such a payment system must be ready to send and receive payments all the time, around the clock, irrespective of weekends and holidays. With real-time payments, there is a finality to them, as once they are processed, they cannot be recalled; however there is also a certainty as both the sender and the recipient receive immediate notice of acceptance or rejection.
Real-time payments were introduced to the U.S financial landscape in part because consumers want faster access to their funds. However, real-time payments is not just about the speed at which money is transferred. Delays in the availability of funds is considered to be the single largest friction point for most consumers with regards to payments. In many cases, it takes several days for funds to become available for consumers and while this may be an annoying inconvenience for some, for others it can be a considerable hardship, sometimes forcing them to utilize check cashing companies that charge huge fees, just to make sure they have the money in hand to pay their bills. Some customers are even saying no to direct deposit, because for them, it doesn’t offer quick enough access to their money.
Banks have done consumers great service by developing easy to use apps and well-designed interfaces that make managing their financial lives easier and better, but if they can’t have quick access to their funds, it’s all pointless. Most consumers do not understand what goes on in a bank’s clearing and settlement processes, and it isn’t something they necessarily need to know. But what they question is, if they can browse, buy and download digital goods in real time why is the digital movement of money not instantaneous? In today’s increasingly instant-everything world, consumers want and demand the ability to make and receive payments faster
Thanks to advancements in technology (including the advent of smartphones, which are the device of choice for accessing the internet), financial institutions are well-positioned to give consumers that real-time, faster availability of funds, and this is why faster payments is such a great opportunity. Despite the non-bank alternatives, consumers still trust banks and credit unions, and consider them to be partners with them in planning and managing their financial lives. In a consumer’s eyes, they are safe, giving them an advantage over newer, alternative payment services like peer-to-peer (P2P) such as LendingClub and Prosper, which do not have the same level of trust and perceived security as do traditional financial institutions.
One of the biggest challenges for real-time payments is the re-engineering of fraud prevention tactics to accommodate the new speed of payments. Batch-based systems (where a number of transactions are processed at a time) simply are not sufficient any longer, nor are they able to handle identifying and preventing fraud in a real-time payments environment, both of which are necessary for achieving secure, faster payments. To accomplish this, emphasis is placed on verifying individuals, not transactions, and ensuing that identification, authentication and authorization pinpoint the right person. Financial institutions need to ensure they have the latest continuous authentication techniques in place to deal with such situations, in order to reduce the risk of fraud in real time payments.
The financial world’s excitement around real-time payments is justified, as it has the potential to become a game-changer for everyone – both those within the payments system and consumers, as well. While it may not be reality for many people worldwide – or even in the United States – just yet, it is coming very soon.
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