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Real-Time Payments: Challenges and Opportunities for Banks

Posted by Bethany Frank on 15 Apr 2016


banks and real time payments

The new millennium marked the inception of a relentless push by businesses in nearly every industry to modernize, maximize, and streamline service. Rapid technological advances and resulting shifts in consumer demand have ushered in new era of business since the onset of the technology boom.

For banks, this has translated into an increased focus on convenience and overall customer satisfaction. Banks are looking to invest in technology that will help them deliver faster service, increase customer loyalty, and remain competitive against new market forces. Real-time payments present lucrative opportunities for banks to revitalize services and business models, as well as a few challenges.

OPPORTUNITY: Revolutionize Service

Modern consumers want financial services that can keep up with the pace of their lives. In a study by Accenture, more than half of survey respondents indicated they would switch banks just to get access to immediate payments. Faster payments rails could make banking instant and frictionless, which could eventually help financial institutions shed their reputations for being slow-moving and old-fashioned.

Technology start-ups, telecom companies, and others are beating banks at their own game by leveraging emerging technologies to cater to highly-specific financial needs. Although banks still benefit from higher levels of consumer trust and confidence, alternative financial services appeal to consumers for their speed and ease of use. Real-time payments could help banks modernize their product and service offerings, compete with the more nimble non-bank players, and regain control over markets they once dominated.

CHALLENGE: Lack of Infrastructure

There has been much discussion surrounding faster payments over the years, but banks largely lack the infrastructure to make it a reality. Current banking systems often operate on bulk-processing and rarely offer 24/7 availability. A real-time payments system, in comparison, would have to maintain around-the-clock availability and low-latency processing.

Some banks offer services that seem immediate to the end-user, but there is currently no banking solution in which payments are actually settled in real-time. With the rise of convenient digital alternatives, however, banks have to adapt to changing business environments or risk a continuous loss of market share to emerging non-bank players. Although implementing real-time payments infrastructure would require some initial investment in system updates and IT development, modernization is likely to become a competitive necessity.

OPPORTUNITY: Capitalize on Consumer Demand

While consumers in the past looked to their local established banking institutions for all financial services, the “unbundling” of banking in modern times is leading many consumers, particularly millennials, to look beyond their banks for things like money transfers and payments. This holds especially true when consumers find value not offered by traditional financial institutions in non-bank products and services. Rather than losing customers due to a lack of supply, banks could increase revenues by responding to consumer demand and giving customers the kinds of products and services they want.

Market demand for real-time payments already exists, but banks have been slow to act on it. The success of P2P payment services like Venmo (now owned by PayPal) and digital payment alternatives illustrate clear consumer interest in products that make financial transactions easier and faster. According to Accenture’s 2015 North American Consumer Payments Survey, 46% of respondents indicated they have used a real-time mobile P2P service like Venmo, with 15% of respondents using them regularly.

CHALLENGE: Undefined Market

A major roadblock to faster payments in the United States is the lack of a spearheading party. With so many considerations for banks to take into account, and so many market forces for regulatory institutions to decipher, the fate of real-time payments has been left hanging thus far.

Many countries lack central modules that can provide the necessary information to complete a transaction in real-time. Bringing faster payments products to market will require more dedication from a number of key players, including third-party technology providers and governments. Until someone takes greater initiative on the path towards real-time payments, its true market potential will remain unknown and untapped.

Consumers long accepted slow transaction processing, delays spanning multiple business days, and inefficient service as unchangeable realities about the banking industry. Emerging alternatives are now giving consumers the freedom and convenience they desire. Banks looking to remain competitive in light of these disruptive market forces can utilize real-time payments to revive consumer interest and keep their customers from flocking to third-party financial service providers. Despite some possible hurdles in its early development stages, financial institutions stand to benefit significantly from investment in next-generation payments infrastructure. For many, it could be key to making a successful transition into the 21st century.

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Bethany Frank

Digital Marketing Analyst

Bethany is responsible for social media and content as part of Alacriti’s marketing team. She has a background in writing, publishing, and digital media. Bethany is a graduate of Rutgers, The State University of New Jersey.

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