Becoming ‘RTP ready’ – How banks can prepare the back office for instant payments

As we approach the 2023 launch of the FedNow service, banks across the U.S. must consider whether they are ready for real-time payments — both technologically and operationally. The 24/7/365 nature of instant payments will likely present new challenges for community banks, but proper preparation will go a long way toward supporting more seamless transition.

For some community financial institutions, adjustments to their current treasury operations and workflows will be necessary. More specifically, many banks will need to review which back-office processes currently require manual intervention and find ways to automate them to facilitate real-time payments in 2023 and beyond.

There are a few practical steps bank leaders should take now to prepare and get ahead of the most common hurdles.

Beware of these back-end challenges

To get ahead of any roadblocks to real-time payments, financial institution leaders should start proactive discussions with appropriate internal stakeholders — as well as any third-party vendors — to ensure that all systems, especially on the back end, are prepared to process payments and the data associated with those transactions in a real-time environment.

Many banks will need to adjust their current treasury operations and IT infrastructure to support this.

Today, it’s not uncommon for community and regional financial institutions to use multiple systems for processing payments on the back end. A bank may use individual legacy systems to process transactions based on the payment type, such as ACH, wire and more. For banks that have grown through mergers or acquisitions, the web of legacy systems being used to process payments tends to expand as well. This creates additional complexities and inefficiencies that hinder a financial institution’s ability to process payments as quickly and cost-effectively as possible.

Instead, financial institutions should first focus on unifying payments and information about those transactions across the different payment types and payment rails. With this centralized approach to payment processing, banks can more quickly and easily manage and process payments in real time, regardless of which channel was used to originate the payment.

By using one system to create a more cohesive payments strategy, banks also gain access to a more robust and centralized view of transaction data. Financial institutions are quickly realizing the potential of the rich data that comes with 24/7 instant payments. The ability to consolidate transaction data from disparate sources into a central hub and view that data in real time can improve compliance, risk management, liquidity management, fraud detection, processing speed and much more.

Back-office and treasury operations: opportunities to automate

To illustrate the value of real-time transaction data, consider the following example. There are many financial institutions that still require employees to memorize hundreds, if not thousands, of codes and manually perform certain tasks, such as reconciling and settling payments. Financial institutions should take a close look at these back-office processes that often require manual intervention.

Can any of these processes be automated to help streamline workflows? Rather than spending hours reconciling payments through multiple channels, balancing accounts and compiling reports, a centralized payments platform can automate and simplify many of these processes, saving time and minimizing the risk of human error.

Therefore, financial institution leaders should consider how they will configure rules and define the parameters for these various back-office workflows, including reconciliation and exception management, to name a few. For instance, some banks may opt to assign specific reconciliation processes for payments based on certain transaction attributes.

A single, unified payment platform can also enhance compliance and risk management. By integrating an open architecture payment platform with a bank’s other systems, such as anti-money laundering and fraud detection tools, the bank can ensure all transactions are processed appropriately without sacrificing speed or being exposed to compliance or security risks.

Additionally, financial institution leaders need to understand how they will maintain suitable liquidity for around-the-clock, instant payments. With real-time views of payment transaction data, financial institutions can optimize their funding positions and improve liquidity management, resulting in fewer missed revenue opportunities.

Preparing for success

With the 2023 launch of the FedNow service quickly approaching, banks across the country are strategizing about when and how their organization will offer real-time payments for their customers.

By deeply understanding their existing payment operations, back-office systems, and the potential challenges and opportunities that real-time payments will offer, financial institutions can approach faster payments with confidence.

Abhishek Veeraghanta is CEO of Pidgin. Previously, he held positions at VSoft, Tesla, MRL Posnet, and PrimeRevenue. Veeraghanta holds a Bachelor of Science in Business Administration, Marketing and Entrepreneurship from Georgia Tech.