Full speed ahead: Why the US has entered the era of payments in the cloud and why now
About a decade ago, the global payments landscape was changed forever by two key developments. The first was the passing of the EU Payments Services Directive (PSD) in 2007, which laid the groundwork for the Single Euro Payments Area (SEPA) and heralded the rise of ISO 20022 as an international payment standard. The second was the launch of the Faster Payments service in the UK in 2008, regarded by industry experts as triggering the roll-out of immediate or “real-time” payments (RTP) schemes across the world.
The infrastructure changes these events ushered in – and the resulting impact on payments services and experiences for banks, consumers and business customers alike – were profound and far-reaching. Yet for several years, the US was a distant spectator to these developments. But that is no longer the case. Today, the US payments ecosystem is seeing faster and more sweeping changes than ever before and is closing the gap.
Any period of rapid change is inevitably a time of uncertainty. But for today’s US payments industry, there’s an added complication: while in some countries the changes have been mandated by regulation, PSD2 in Europe for example, in the US they’ve been left to the market to decide. The result? Banks in the US must consider their choices carefully and build a positive business case for new payments models.
To help them make the right calls, a report from Celent commissioned by Finastra examines US banks’ options and optimal approaches to the payments revolution titled, US Payments in the Cloud: A Response To Uncertain Times, the report concludes that the time has come for banks to embrace cloud-based payments models. This article is the first of two based on the report.
So, what are the changes driving the move to new payments models? As the global wave of payments transformation has reached US shores, it’s triggered three major initiatives: the Federal Reserve’s push towards real-time payments; the migration of wire payments to ISO 20022; and rising support and usage of application programming interfaces (APIs).
In terms of real-time payments, the Federal Reserve and our friends at The Clearing House have set a goal to enable ubiquitous receipt capabilities by 2020. It is also moving the US wire transfer systems towards ISO 20022, aiming to begin production rollout across FedWire and CHIPS in 2020. At the same time, support for APIs is accelerating, with NACHA currently standardizing a number of the APIs in its playbook to speed adoption.
How should banks respond? Since the last time many banks acquired payments technology, two important changes have occurred: first, the creation of the payment services hub; and second, the advent of cloud computing. Both of these technologies can improve adaptability to future changes, allow banks and their customers to avoid delays by rerouting payments quickly and easily, and reduce risk by automating the entire payments lifecycle.
Payment services hubs’ technical complexity means they have traditionally been seen as the preserve of the biggest banks. But cloud democratizes the hub functionality by allowing it to be provided in a simple, consumable way. The way forward for banks lies in combining hub and cloud to get the best from both.
The hub means just one solution covers every payment type, with a single connection and consistent set of tools and interfaces. The cloud adds other benefits, enabling – for example – for Finastra to turn on new functionality instantly, with zero code changes for the bank. The result is a quick, low-cost approach to get started with real-time payments, with a clear path forward to deal with other changes and volume growth over time. Furthermore, cloud’s 24/7 nature means a cloud-based hub can comply more easily with the always-available, zero downtime world of real-time payments.
All of this explains why US banks should embrace payments in the cloud – and should do so today, before they get left behind. In our second article, we examine the key steps in selecting payments technology and bust some myths about cloud.
To learn more, download the white paper, US Payments in the Cloud: A Response to Uncertain Times, at finastra.com/viewpoints/market-insights/payments-in-the-cloud.