By Kristen Jason and Mark Majeske
Instant payments represent an opportunity for community banks to meet the ever-growing demands of their customers. However, they have to first think about how they will connect. One such solution that has gained significant traction is the adoption of payments hubs. To explore this trend and its implications for community banks, Kristen Jason (KJ) sat down with Mark Majeske (MM), a leading expert in payment technology and one of the original members of the team that developed and launched the RTP® network. Majeske provided valuable insights into the evolution of payments hubs, their transition from traditional on-premises installations to advanced, cloud-based platforms, and the myriad of benefits they offer to community banks.
KJ: Can you explain what a ‘payments hub’ is today?
MM: Payments hubs are an integral part of an FI’s payments infrastructure. Hubs are frequently deployed to take advantage of many payment types at an enterprise level at an FI. This way, all payments made by the same FI through a number of different lines of business (loans, mortgages, cards, retail, etc.) are centralized. As a result, the FI can take advantage of savings offered by partners because it’s consolidating its payments volume through one provider.
Payments hubs have evolved greatly in recent years. They transitioned from on-prem installations, which took about a year to complete at a very high cost, and future upgrades were cumbersome and costly. The goal was to create a centralized infrastructure capable of servicing multiple lines of business (LOBs), offering many payment rail options, reducing vendor and internal costs, and providing the FI LOBs with the most advanced options to promote innovative new products.
Today, fintechs like Alacriti offer cloud-based payments hubs that are fast, secure, and provide new and innovative payment options. The objective is to implement a solution that is quick to deploy, and low-cost both initially and longer term while offering a centralized connection to wires, ACH, the RTP network, the FedNow® Service, Visa Direct, and others. With this combination of simplicity, cost reduction, and selection of new payment options, banks of all sizes can benefit from implementing payment hubs within their organizations.
KJ: Community banks have the option to connect to the FedNow Service or the RTP network directly or through a TSPS. What do you think the institutions you talk to who decide to use a TSPS have in common?
MM: Community banks must consider various factors when deploying directly with instant payment networks (RTP network/FedNow Service) or utilizing a TSPS like Alacriti. In my experience, larger institutions (Top 10 Banks) are more likely to go directly to the networks. This is because they have ample funding and resources to manage the implementation and the day-to-day functions required to accommodate these rails.
However, 95% of the FIs I’ve seen tend to utilize a TSPS to connect to these new payment rails. The reason is reduced cost and ease of implementation coupled with the reduction of daily tasks on an ongoing basis to support these rails. TSPS offer a cloud-based solution that includes conversion (if necessary) of ISO 20022 messages emanating from today’s instant payment networks. TSPS like Alacriti can also integrate directly into a bank’s payments core, providing options outside their core provider and reducing the daily operational tasks for supporting the new rails. The decision for most FIs to utilize a TSPS is further enhanced by additional available solutions, including guidance on fraud decisions, use cases, and UI/UX enhancements.
KJ: Connecting to instant payment rails takes some preparation. What should community banks do to prepare?
MM: Community banks should first focus on how they plan to utilize these new payment capabilities to enhance their customer experience. Take the time to identify customer needs and create new and innovative solutions that fill gaps or enhance your customers’ experience, therefore reducing attrition. Then, they should focus on areas such as creating new processes that enhance operational, risk/fraud, liquidity, customer service, and other internal and external considerations. The bank should also, in parallel, work with internal and external teams to decide objectives on items like business cases/ROI, use cases (for product development), product monetization, and user experience.
Most importantly, if using a TSPS, find someone who can act as a partner in your end-to-end success vs. just facilitating an immediate need. Implementing instant payments is a journey vs. a one-time effort. If done correctly with a partner, you will be amazed at what you can accomplish no matter how small or large your organization.
KJ: Once connected, what is the impact on operations?
MM: The items that come to mind when considering operational changes include core integration, GL configuration, settlement, customer service, liquidity management, risk/fraud management, and overall consolidation of all processes within your FI. The best way I know of doing this is to trace the end-to-end life cycle of a transaction and identify all of the stakeholders in that process. By doing this, you avoid omitting someone on the project team who will prove to be vital as the project progresses. Having well-thought-out operational plans can assist you in reducing costs and increasing efficiencies both at the project level and during the day-to-day operations of the product offering.
KJ: Can you explain the different ways to connect to participate with real-time payments?
MM: If you had asked me that question a year or more ago, I would have given you a much different response. When the RTP network first launched, everyone participating signed up for the Receive Only capability. That obviously did not do a lot for volume. Eventually, network participants began Sending and creating large-scale use cases, enabling people to start using RTP regularly.
Today, we see more FIs electing to connect to the instant payment networks (RTP network and FedNow Service) as Send and Receive institutions. As a result, over 90% of FI’s who participate in an instant payment network implementation receive incoming transactions around 5 minutes after they go live in production. This is a testament to where these new networks are headed in terms of volume growth. Once a customer uses RTP or FedNow, they are unlikely to use anything else due to the positive user experience.
KJ: Do you think the Request for Payment (RFP) functionality will have true value for community banks?
MM: Absolutely! To me, it all comes down to customer experience. There are two types of use cases: Receive and Send. It is important to note that whether you’re sending or not, your customers can take advantage of the many Receive use cases that have developed. These include online wallets like Venmo and PayPal, instant cash loan services, daily payroll, retirement payments, title payments, and sports betting, to name a few.
When you become a Send FI, most people initially offer use cases like car loans, loan disbursements, A2A transfers, payroll, real estate/title closings, and paying utility bills. These are just a few considerations for FIs when determining the value of instant payments to their customers.
RFP was specifically designed to enable the transfer of both funds and data directly to a recipient. When properly designed, a product using RFP could be used to collect overdue funds, safely fund a real estate transaction, or deliver a company invoice to a person or company electronically with the ability to respond through the same system. Although not widely used at this point, many FIs are in the process of designing use cases poised to take advantage of RFP capabilities.
KJ: What are some risks associated with transitioning to real-time payments, and how can community banks mitigate them?
MM: When considering sending on the instant payment networks, I suggest people first assess your current solution/capabilities for ACH and wire. Identify existing gaps in your current solution and make sure that when you add additional capability for instant payments, you also address existing gaps.
Instant payments require a fraud solution that includes the following attributes: 1) Real-time transaction analysis and decisioning, 2) Proactive transaction decisioning preventing fraudulent activity before it occurs, 3) Can accommodate ACH and wire transactions, 4) Usage of AI and machine learning, and 5) utilization of consortium data from a collection of other FI’s. Another suggestion is to adopt a layered approach to your fraud solution, ultimately including transaction-based analysis, individual analysis (sender and receiver), and device analysis methodologies.
One of the great things about instant payments is that anyone can deploy it regardless of FI size. To me, competitiveness ultimately comes down to creating a robust customer experience that is stellar. By getting feedback from your customers and reacting with instant payment solutions, you are making their lives easier. Hence your organization becomes an integral part of their banking activity. I see the RTP and FedNow networks as tools…not products. These networks were designed to provide a payments infrastructure that accommodates innovative ideas coming from banks and fintechs.
KJ: How can community banks leverage instant payments to stay competitive?
MM: I urge banks of any size to explore ways to make instant payments an ingredient to making their organizations competitive and successful! Instant payment networks were designed to bring the latest in payment technology to FIs of any size—enabling them to compete with anyone at a scale that balances both cost and functionality. RTP and FedNow enable you to be innovative while addressing your customer’s current and future needs. You can begin by analyzing your customer base and identify gaps in your current offering(s). Take time to discover what they would like to do and how. Convert this information to use cases and identify which can utilize instant payments. Remember, RTP and FedNow are tools, not products, and can be used in many ways. Many FIs begin Sending by simply offering loan disbursements to customers or moving funds internally from one line of business to another. The possibilities are only limited by your innovation!
About the Authors
Kristen Jason, Alacriti Director of Product Marketing, is responsible for marketing strategy and content for Alacriti while staying abreast of industry trends.
As Senior Vice President of Faster Payments at Alacriti, Mark Majeske leads the overall corporate faster payments strategy and product development of the Orbipay Payments Hub. Mark also currently serves in the Faster Payments Council Board Advisory Group.