This year, more than most, has lots of potentially impactful factors when it comes to digital banking in 2023, and one sure shot. We don’t yet know for example, how the general economy will behave as consumers contend with the continued rise of inflation and potential recession. We don’t know how willing consumers are going to be to share data and embrace the open banking principles that have gained traction in the UK and EU, but have stalled in the US. But one thing we do know is that at the end of the day – or the year for that matter – 2023 will be about the speed and accuracy of business payments.
The driver behind this is real-time/instant/faster payments (depending on the geography you’re working in and the rails you’re sending a payment through). In the US real-time payments have been being spearheaded by The Clearing House (TCH. To say it will see some new competition in 2023 is an understatement. The Federal Reserve will enter the market with its Instant Payments platform sometime in the late spring or early summer. Federal government entrance will do more than shake up the market and push high speed rails to the top of the to do list for finance leaders. It will expand access to high-speed payment rails beyond the top tier financial institutions that currently use them. For some perspective, many sources, including a recent PYMNTS report, puts real-time transactions through current rails (TCH, NACHA) at 1.8 billion in 2022 with a spike to 8.9 billion by 2026. That’s a dramatic growth curve for any business and proof that digital transformation isn’t just a buzz phrase. Real-time payments is what digital transformation looks like.
It’s important to point out that features like real-time payments are poised for growth in the commercial banking sector as well as retail. Commercial banking needs to catch up to retail banking when it comes to payment mechanisms. Some of those mechanisms – particularly peer-to-peer payments – were accelerated by the pandemic when consumers were demanding low-touch payments. These B2C features will start to have a bigger impact next year. For example, 45% of bankers say they will increase investment in mobile technology to support B2B payments next year, according to research from the Association for Financial Professionals. It’s also interesting to note that the report stated that: “Speed is critical for B2B payments. A majority of all survey respondents (54%) report that speed is the primary driver when choosing a payment method. And 62% of all survey respondents report that B2B transactions will benefit the most from faster/real-time payments.”
There’s nothing but upside to real-time payments. Its momentum is the logical evolution of a trend started during the pandemic when consumers turned to peer-to-peer payments and contactless technology and businesses turned to accepting new forms of payment. It follows that real-time payments became a way not only for businesses to pay each other, but their employees as well. It has the advantage of allowing a company to hold onto their cash longer and only make payments at the required minute to take advantage of advantageous payment terms. Payments of any kind are first and foremost a liquidity tool that should be understood and utilized in the manner. But with all this upside comes one major concern for me and that’s complacency.
The attitude of “wait until next quarter” won’t work during 2023, regardless of the economic picture. I think banks need to actively innovative new use cases and add on services that they can create around instant payments. There's really no benefit at this point of waiting for the Fed to make any more announcements about the FedNow service. We know what the message sets are (featuring the data-rich ISO 20022); we know what the production or live dates are going to be; we know the pricing structure and we know the technology partners. Delay will run the risk of customers seeing their bank as lagging in essential technology, which opens the door more aggressive competitors.
The need for speed is not limited to the US or the Fed. In fact, the urgency to adopt them in the European Union might be more dramatic. The EU finance commission closed 2022 by proposing an update to its 2012 instant payments regulations. It has four main aspects. The first would make instant payments universally available in euros. Second, it would make these payments more affordable, mandating that they stay in line with pricing models for non-instant transfers. Third, it would implement an obligation similar to the UK's confirmation of payee which requires payment service providers to match the international bank account number on the name of the beneficiary. And fourth, it requires payment service providers to verify their clients against the EU sanctions list.
But there's will be a lot more going on this year in the EU, as my colleague Frederic Viard, head of products for Bottomline’s financial messaging told me recently. He believes the shaky economy and continued geopolitical instability in the region will lead banks to exercise caution in their investments and prioritize business continuity. That translates to a focus on profits and the customer experience.
“Protecting the customer as an asset will be achieved by continuing to invest in digital banking for an improved experience,” Viard says. “These could drive to a broader adoption of new methods of opening new accounts and allowing more data access via open banking. All this must happen while ensuring compliance with regulatory mandates and managing liquidity.”
The Bottomline: Banks all over the globe must make 2023 the year of real-time and instant payments but they can’t stop there. They need to actively look for innovative new use cases and add on services. For example, instant payments have added communication vehicles – many part of the ISO 20022 protocol – that can extend payment confirmation and avoid fraud. Banks shouldn’t wait for someone else to figure out how to serve, protect and stay in touch with their customers. If they do, they may not be in very good shape come 2024.