The fintech boom hasn't reached payment processing

While fintech has led to many positive advances within the U.S. financial services industry, there’s one segment of the market still awaiting its transformation: payments processing. According to The Federal Reserve Payments Study from 2019, noncash payments reached 174.2 billion in 2018, an increase of 30.6 billion from 2015. And the majority of those payments are still processed in batches, at a single time each day, sometimes even manually — creating massive friction for your customers.

Why does it matter how payments are processed? Because digital payments are a big part of the customer experience now. Not only are they convenient, but they’re fun! Part of Venmo’s appeal, for example, is the ability to send along an emoji or two with a payment. You can’t do that with cash. People also want — and, really, at this point, expect — their payments to be instantaneous. This is where community banks can set themselves apart from the competition, by enabling payments innovation especially real-time payments.

Real-time payments, of course, aren’t a new concept in banking. The Federal Reserve has called for faster payment mechanisms for years, floating the idea of a national infrastructure for RTPs and finally formally announcing a plan last fall to develop a new round-the-clock RTP and settlement service that would modernize current systems, called FedNow. The Clearing House, a consortium of the nation’s largest banks, has also created its own real-time network, but thus far only a fraction of the nation’s thousands of banks have signed up for it, and generally the larger ones.

This means that RTPs are still theoretical for the vast majority of banks in the U.S. — and thus their customers as well. This is especially true among community banks and credit unions that don’t have the massive tech budgets of most megabanks. The challenge for community banks lies within; many still run on legacy technology that operates on batch processing, meaning that rolling out RTPs and other cool, digital financial services is an operational nightmare.

And any bank that is thinking of bolting a piece of legacy technology onto an existing real-time network — whether that be The Clearing House, FedNow or any other — will have structural concerns to consider. Take the fact that legacy core technology does not encrypt data. Attaching a legacy system to an encrypted RTP structure compromises that digital system, creating the potential for a major security breach.

Legacy systems built 20 or 30 years ago don't have the ability to “talk” to modern real-time networks, which will lead to inefficiencies, jumbled data and constant upkeep. Now you’ve got virtually unrelated systems in your back-end ecosystem, and a very large IT and compliance headache.

As true as all the above may be, you still need to enable real-time environments for your customers; if you don’t they’ll look for a bank that does. So what’s a community bank saddled with legacy tech to do?

Sultan Meghji, a co-founder of Neocova, co-wrote this article.