BankingCorporate to Bank RelationshipsImpatient innovation: the race to go real-time in commercial banking

Impatient innovation: the race to go real-time in commercial banking

We’ve all become more impatient as digital services are increasingly real-time and in many cases instantaneous. Look at the big winners out there: Uber, Klarna and Amazon. Each organisation has innovated to reduce impatience by dramatically reducing wait time and offering real-time updates. In banking, there is a similar pattern.

The nature of patience has changed.

Yesterday, I ordered a taxi from Lyft. The app indicated the driver was eight minutes away. I cancelled the fare. Eight minutes – that’s a lifetime I thought. Switching to Uber, I had a taxi arrive in under two minutes.

I’ve also begun to use UberEats. But recently I was staying somewhere outside of its coverage. I ordered a take out over the phone. Not only did it take over an hour, missed the ability to track my order in real-time.

I don’t think I’m alone.

We’ve all become more impatient as digital services are increasingly real-time and in many cases instantaneous. Look at the big winners out there across different sectors like Uber, Klarna and Amazon. Each organisation has innovated to reduce impatience by dramatically reducing wait time and offering real-time updates.

In banking, we’ve seen a similar pattern. Retail P2P payment services which act in real-time like Zelle and Venmo have seen accelerated customer adoption. The question is will a broader church of financial services go real-time?

Now recent research from analyst firm Ovum, commissioned by Icon Solutions, has revealed that commercial banking is set to go real-time, enabled by real-time payments (RTP).

The report The Rise of Real-Time Payments in North America, is based on interviews with 211 North American institutions. It found that in the short term, real-time services are viewed as essential to effectively compete for corporate clients. In the long term, real-time payment (RTP) infrastructure will become the foundation for banks’ transition into an open banking environment.

Real-time payments driving fintech spend

In the US the intention is to have a ubiquitous faster payment system operational by 2020, and banks are investing in the race to meet that deadline.

According to the report, North American commercial bank IT spend is set to increase by a staggering $3.3bn, growing to $17.1bn per year by 2021, driven significantly by the shift to RTP. Consequently, 50% of US banks and 40% of Canadian banks plan to increase investment in RTP with nearly a quarter of these banks increasing their budgets by over 6% YoY.

Despite competing claims on firms’ budgets, many banks are realizing that this is a unique opportunity to put in place systems that will enable them to address the challenges of digitalization and the emergence of new open banking ecosystems where the sharing of customer data is the norm.

The foundation for service innovation

While some of the priorities of commercial banks are driven by wider issues such as data security and regulatory compliance, the top three areas for IT investment – cash management services, liquidity risk management and mobile banking – are all underpinned by RTP. In my mind, this provides evidence that commercial banks see RTPs as providing a foundational capability to address existing service limitations.

Cash management services – high on the list of demands from corporate clients – is a key investment area for US commercial banks about to implement RTP infrastructures, along with the provision of real-time cash positions, scenario-based forecasting and direct integration with client systems.

Banks in Canada, not as advanced on the RTP implementation timetable, are far less active in this area, but can be expected to turn their attention to it in the future as customers demand greater real-time availability of real-time data.

Real-time commercial banking

Banks, desperate to break from the stuttering world of batch processing, must implement RTP to unlock real-time transaction data and unleash a powerful wave of real-time services.

While the research reveals differing priorities across geographies, real-time transaction data is the enabler of the three most important new services in both the US and Canada:

  • Artificial intelligence (39%), real-time account balances (33%) and cash management/forecasting (33%) for US banks
  • Mobile banking (40%), online banking (40%) and bulk payment processing (40%) for Canadian banks

So for banks in the US access to real-time information, analytics and other services based around transaction data is paramount. After all, what good is artificial intelligence if it’s dealing with account data from three days ago?

In Canada, the focus is different and concentrated more heavily on providing access to RTP, along with enhanced services via digital interfaces.

Regardless of market, for commercial banks and their corporate clients, there is a clear shift towards deepening relationships and service enhancements driven by analysis of real-time transaction information.

Open banking and payment convergence

Canadian commercial banks, and to a lesser extent US banks, like those across the rest of the world are taking steps to prepare themselves for open banking.

What was started by the EU’s Second Payment Service Directive (PSD2), under which account holders can authorize trusted third parties to access account data or initiate payments, has become a global trend as banks realise the mountain of customer data they ‘own’ is critical to their future success.

As a result, 100% of Canadian institutions are developing APIs. US banks are further behind with just 56% confirming APIs are in their plans for the next year.

For open banking to be a success, both banks and third parties need access to real-time customer information to deliver compelling offerings. As such, the investments being made in RTP and open banking imply a future convergence of commercial and retail payments as banks look beyond traditional payments systems.

The race is on

Traditional applications and middleware used today were designed for a batch world, have costly software development lifecycles, and require expensive arrays of hardware to function. They are incongruous with the demands of corporate clients in the short term and open banking models in the long term.

The next wave of technological innovation is designed differently, starting with rapid prototyping, reliable scaling at low cost, and emphasis on an optimised time-to-market.

As the report highlights, to address service offerings that have lagged behind customer needs, and maintain competitiveness with rival banks, and increasingly fintechs, North American institutions need to adopt frameworks that deliver real-time agility as we enter the age of open banking.

Impatient innovation will continue to drive the market. And the race is well and truly on to stay ahead.

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