Legacy Banks Struggle with Real-Time Payment Integration

In an age dominated by instant payment platforms like Venmo and Zelle, the majority of U.S. banks continue to rely on outdated payment-processing technology from the 1980s. Consumers have increasingly embraced real-time payments, favoring digital-first nonbank financial services for their speed and convenience. This has left many traditional banks struggling to keep up with both customer expectations and the capabilities of their competitors.

Moving Away from Batch Processing

Legacy U.S. banks currently have several options for real-time payments, including the recently launched FedNow, the Clearing House, and traditional card networks. The central issue, however, is whether these banks' existing infrastructure can genuinely support real-time payments.

Most banks still rely on batch processing for payments. For the first time in over 40 years, new technologies like RTP and FedNow allow for money to be transferred in real time. The entire financial infrastructure, as well as operational processes, needs to transition to a 24/7/365 environment to fully leverage the benefits of real-time payments. 

Most banks handle Same Day ACH by running multiple batches daily. To achieve a truly real-time system, you can't run batch processing for every transaction. Fundamental changes to the infrastructure are necessary to support real-time payments.

The Components of Real-Time Banking

For legacy banks to catch up, they must address real-time payments, real-time settlement, and real-time core processing. The demand for faster, genuinely real-time payments necessitates an overhaul of the supporting infrastructure.

As more systems process transactions in real time, it becomes increasingly crucial for legacy core systems to clear and settle transactions in real time.  Otherwise, misalignments in payment and settlement times can lead to issues such as fraud or insufficient funds.

Many banks use a memo post, giving customers the impression of real-time transactions, though the core system updates later. Banks are essentially faking real-time processing. As payment products evolve, this approach will become untenable.

Consumers have grown accustomed to the convenience of real-time money transfers, although the back-end processes might not be instant. This underscores the importance of financial institutions adopting systems capable of truly moving funds in real time

Currently, banks impose transaction limits on platforms like Zelle or debit card transactions. With real-time settlement, these limits could be raised due to the increased certainty of fund clearance.

 The Impact on Legacy Infrastructure

Real-time capabilities significantly impact legacy infrastructure. Traditionally, banks process ACH transactions in batches, routing them through various systems designed to handle settlement delays. These systems include fraud detection mechanisms and multiple balance updates across several days.

For genuine real-time settlement, the entire payment processing framework needs to evolve. Fraud models, funds availability models, and back-end core processing must all adapt. The key use case for real-time payments: last-minute bill payments. Real-time payments enhance the customer experience with instant notifications and confirmations

Breaking Free from Silos

Another challenge for banks is the prevalent siloing within their systems. Many of these systems are owned by different departments. Without a holistic approach, each department may develop its own strategy for real-time processing.

Consensus exists on the necessary steps: integrating bill pay with payment acquisition, risk, and core systems, while considering regulatory interactions. Only within such a comprehensive framework can banks continually improve and ultimately provide superior service to their customers.