As the world continues to move toward cashless and digital payment models, consumers expect their accounts, money and personal information to be protected. To achieve security, we need to prove this level of confidence at every stage of the payment process and continually evaluate it. Payment innovation in an interconnected, digital world is complex, which can lead to risks and vulnerabilities.
Due to bad actors, the payment ecosystem is one of the first to have developed a structured and robust approach to cybersecurity. Over the years, multiple forms of digital payment have emerged. From debit and credit cards and dedicated point-of-service (POS) terminals, countries around the world have rapidly evolved toward making or accepting payments via smartphone, using a digital wallet, a QR code or an app. Today, everyday consumer and industrial smart devices increasingly incorporate payment functionality. Smart appliances, smart cars and warehouse management devices are a few examples of devices that incorporate payment functionality. This means that securing them includes securing their payment functionality.
As the finance industry shifts toward the global standard for financial operational systems (ISO 20022, Financial Services – Universal Financial Industry Message Scheme), the adoption of real-time payment tools has accelerated. The standard enables faster, high-value, cross-border payments. It will impact payments, including the payments consumers make in-store while shopping. This is especially true if we consider how the traditional pocket wallet has transformed into an electronic wallet on a smartphone tied directly to a consumer’s bank account.
Demand from both consumers and merchants for instant, seamless and invisible payments is driving the ask for more robust access to faster and more efficient payments. According to the U.S. Federal Reserve, a new system, FedNow, will be available by July 2023 to enable individuals and businesses to send instant payments through their depository institutional accounts 24/7/365 with security features to support payment integrity and data security. On its website, the U.S. Federal Reserve indicates, “The service is intended to be a flexible, neutral platform that supports a broad variety of instant payments. At the most fundamental level, the service will provide interbank clearing and settlement that enables funds to be transferred from the account of a sender to the account of a receiver in near-real time and at any time, any day of the year. Depository institutions and their service providers will be able to build on this fundamental capability to offer value-added services to their customers.” (1)
This is important because consumer-to-business (C2B) bill pay enables individuals and businesses to pay bills that post to the biller’s account immediately, simplifying account management, avoiding late fees and helping companies manage cash flow. The adoption of real-time payments is rapidly increasing. However, these payment innovations in an interconnected, digital world are intricate, which may pose risks and vulnerabilities.
The first payment rail sponsored by the Federal Reserve Banks since the introduction of the Automated Clearing House (ACH) in the early 1970s, the FedNow Service will enable instant payments for financial institutions of any size, in any community, 365 days of the year. Consistent with the Federal Reserve System’s historical role of providing payment services alongside those in the private sector, the FedNow Service will offer choices in the market for clearing and settling instant payments as well as promoting resiliency through redundancy. Financial institutions and their service providers will be able to use the service as a springboard to provide innovative instant payment services to customers. Recent research from FIS, a technology services provider to merchants and banks, suggests that real-time payments in the U.S. market are approaching a tipping point. Still, many smaller financial institutions have yet to embrace them. The FedNow Service is addressing this gap by enabling financial institutions across the U.S. to provide safer and more efficient instant payment services.
According to a recent industry white paper, “Several industries have proved the value of real-time payments and will be early use cases for FedNow. These include payroll, utilities, telecom and insurance. Use cases are also emerging within higher education and healthcare. It is becoming clear that the value of real-time payments is not use-case-dependent; it is desirable for all payments to be more efficient. Some financial institutions struggle to explain to clients the value of a real-time payment as a working capital tool. Allowing funds to be sent at a specific moment is valuable to small businesses whose cash flow dictates daily decisions, such as vendor payment timing.” (2)
Financial institutions need to have the right systems in place to be able to manage the increased data flows that will follow from adopting ISO 20022; they’ll need to make sure they’re up to the job. It’s all about data enrichment, and in collecting more and more data, even a single syntax error could result in denial of transactions between organizations across the globe. The sheer scale of the technology transformation many financial institutions need in order to meet the demands of ISO 20022 — including big banks, which have for decades kept adding components to their legacy infrastructure — is such that they now have to make great strategic decisions.
The future of real-time payments is now. They are here, and consumers, merchants and financial institutions need to be ready for them. Our next and last article on the future of payments will be about soft point-of-sale (POS) transactions.
(1) https://www.federalreserve.gov/paymentsystems/fednow_about.htm
(2) Aite-Novarica, “FedNow is Almost here: What to Know Before the Launch of Fednow,” April 2022.
