Today’s consumers, who are constantly connected to the internet through smartphones and other mobile devices, expect instant gratification.
Regardless of age, consumers will not wait longer than a few seconds for results from an internet search engine. Naturally, it is confounding that payments cannot be settled just as quickly.
This mindset will only strengthen as younger generations accumulate more spending power and their impatience for traditional service models grows. Beyond consumers, businesses of all sizes expect to see benefits from faster payments processes, as real-time settlement of transactions can help them reach their full potential by enabling better, more accurate cash management and improving liquidity.
For all the value that faster payments can bring to consumers and businesses across verticals, concerns about risk management and compliance continue to prevent the U.S. financial industry from enacting a real-time payments model. In fact, the Federal Reserve’s Faster Payments Task Force issued a new
The Federal Reserve’s objective here is to reduce fraud risk and advance the safety, security and resiliency of the payment system by analyzing payment security vulnerabilities, assessing potential approaches to mitigate them and identifying misalignment of incentives that may hinder progress toward real-time payments.
The answer to this issue can be found in data, specifically real-time data. Access to real-time data facilitates real-time monitoring of that data, which means detecting and responding to potential threats can happen much faster. Yet, most financial institutions still use outdated legacy systems that are siloed by factors such as lines of business and geography.
As a result, it is very difficult for the institution to form a comprehensive view of their customer and their financial activities, making it challenging to analyze possible risks. Additionally, the legacy approach of random, batch-based, post-transaction testing will not scale. Instead, centralizing systems and enabling access to a unified, real-time view of data is necessary for supporting scalable risk-scoring of transactions and ultimately, facilitating the widespread adoption of real-time payments.
Financial institutions can leverage real-time data to analyze nearly every aspect of a transaction within seconds, including what other payments a customer has recently made and potential concerns regarding a specific transaction. Armed with this knowledge, financial institutions can designate risk levels for certain types of transactions based on pre-determined criteria. This gives banks a deep understanding of the types of activities its customers partake in and with whom they are transacting.
Given the growing regulatory pressures financial institutions face to establish more stringent anti money laundering procedures, using data to institute real-time risk scoring and risk detection models is essential. The insight data can deliver through real-time risk detection can help banks quickly identify and respond to any potential threats and negative implications stemming from a transaction without hindering faster processing of payments.
With a dynamic and scalable real-time approach to risk scoring, the financial industry as a whole would likely witness increased innovation. Such an approach ensures that all transactions can be risk scored and checked for compliance before being processed. For transactions that do not meet the risk score or compliance check, banks would have the ability to automatically stop that transaction. This alleviates concerns about compliance and risk, allowing banks to focus on developing and introducing new, innovative products that are enabled by real-time payments.
Additionally, by capitalizing on real-time data and real-time risk scoring, along with existing technology like APIs, financial institutions and fintech startups can work together more strategically and ensure the success of a faster payments system.
Opening up access to a real-time risk management platform will further support innovation efforts, enabling application developers, software engineers and other banks to build new digital banking and real-time payments products while maintaining regulatory compliance. This productive collaboration will empower rapid modernization of the banking industry and together, these players can design products and services that anticipate market needs across numerous verticals, for both businesses and consumers.
