This year has thrown many financial institutions (FIs) and businesses for a loop as consumers became more dependent on digital payments while economic realities forced many entities to cut back on technology and innovation spend. As we move into 2021, there are a couple of areas where progress is likely to pick back up — and even accelerate — to make more efficient payment processing a reality.
Open banking and real-time payments are two initiatives that have been slowly but surely gaining traction over the past several years. The pandemic has, perhaps, brought the necessity of these initiatives to the forefront as consumers and businesses depend on the ability to quickly, easily, securely, and remotely transact and move money. We anticipate that 2021 will usher in a renewed gusto in these areas, affording FIs, businesses, and consumers more seamless ways to manage payments.
This article looks at two key shifts that FIs and businesses can anticipate in the coming year.
A More Proactive Approach to Open Banking
Open banking — where third-party providers can access banking and transaction information from FIs through APIs — is setting the foundation for real-time payments while also serving as a major source for other financial innovations. FIs in the U.S. have been slow to entertain the open banking concept, but an increasing number have realized that open banking will be essential to deliver more customer-centric products and services and to compete in a crowded marketplace.
FIs that currently leverage the open banking model must cover a wide range of payment activities via APIs, including many different settlement types, time-restricted payments, and high ticket transactions. As some of these payment types are constrained by limits, they must be removed for APIs to push those payments through settlement networks.
Open banking technologies are becoming more flexible and easier to integrate, so more FIs will likely adopt an open banking model in 2021. To take advantage of this opportunity and to minimize internal headaches, FIs must consider the types of APIs in use today, the types of payments that can be supported by APIs, and how customers and vendors can use those APIs. Digital transformation and modernization of payments will undoubtedly require a look at core systems and the costs and time it will take to implement a new framework.
Many payments organizations are moving toward an API-led approach to connect internal applications, devices, and data with minimal risk. This type of approach streamlines data-sharing, enables third-party applications and collaboration, and facilitates rapid development — all of which can present a competitive advantage for organizations that take a proactive approach with APIs.
The benefits of adopting open banking for FIs and API-led connectivity for fintechs are undeniable. These approaches can streamline banking connections, deliver deeper insights into payments, and facilitate self-service options. The result is that FIs and fintechs can steer resources toward more strategic initiatives and spend more time innovating faster, more customer-centric products and services.
Progress With Real-Time Payments
Real-time payments are still in the early stages of development, with a dependence on various technologies that still need to mature. That said, the push for real-time payments is expected to make meaningful progress in 2021.
Real-time payments have broad applications that extend to businesses, banks, and customers. The fast movement of money isn’t the only benefit, either. Real-time payments promise to open up the lines of communication between FIs and their corporate and retail customers as well. Not only will payments happen faster, but entities will also gain the ability to transfer funds multiple times each day.
This has significant impacts for businesses that face challenges sending wires against cutoffs and deadlines that can hamper timely transaction settlement. Real-time payments offer the ability to handle payments around the clock and from any device. This helps businesses manage cash flows more seamlessly, access funds faster, and gain more insights into transactions.
There are a few areas connected to real-time payments that should see improvement this year, including the settlement networks, open banking, and technology. As FIs and fintechs continue to collaborate and build new settlement networks that are more efficient, the path to real-time payments will become more straightforward. Expanded settlement networks can offer better features and facilitate larger transaction amounts, offering more efficient payment processing across the board. User-friendly technology will also be critical in the push for real-time payments and will hopefully accelerate in the post-pandemic landscape.
While the pandemic may have thrown a wrench into some payments-related initiatives, it also highlighted the need for more collaboration, increased innovation, and more efficient payments. FIs and businesses continue to adapt quickly to rapid changes in the payments landscape, and this effort should be aided by an increased focus on both open banking and real-time payments in 2021. It’s all but certain that the payments landscape will undergo deep transformations in several areas as we move into the new year.
