A healthy wire operation is the heart of any financial institution’s payments business. Banks need to provide resilient wire services in the face of increasing volumes and demanding SLAs, as well as ‘black swan’ events like the current COVID-19 crisis. Whatever the situation, downtime for payment systems is not an option.
They must also be ready for the future of wires: 24/7 processing and ISO 20022 messaging. This article explores the latest wire trends and how financial institutions can navigate them. It also outlines a new approach: wire processing as a service in the cloud, which offers a fast track to payments modernization at low cost.
Fedwire today: An overview
Fedwire, the real-time gross settlement (RTGS) system in the United States, is doing well overall. The U.S. wire business is healthy and growing, with 167 million wires in 2019 alone. The average volume growth is at nearly 6%, which is three times greater than GDP and inflation growth. That said, the average value of a wire has declined by 40% since 2015, meaning transaction values are shrinking.
Additionally, the average revenue growth for payments hovers around 3%. If volumes are growing at double the rate as revenues, it means margins are going down. To combat this, a heavy focus on making wire processing more efficient is needed.
Future trends in wire payments
There are a few noteworthy trends anticipated for wire payments in the short and long-term future. Here are two of the key upcoming trends:
- Fedwire’s move to ISO 20022 messaging.
Fedwire will utilize ISO 20022-based messaging, which is a complete shift from today’s formats. ISO 20022’s data-rich messaging allows more information about a transaction to be transmitted in real time, eliminating slow payment processes. The future migration to 20022 will bring both opportunities and challenges, and will have a large impact on the payments industry.
- The extension of settlement hours and the move to 24/7 real-time payments.
By March 2021, the Federal Reserve will extend its National Settlement Service’s (NSS) operating hours by 45 minutes, extending the time for initiating Fedwire transfers on behalf of third parties to 6:45 p.m. ET. This extension is just the start. Looking further into the future, large-value wires will be enabled every day, all day.
Between the rising volume growth, move to ISO 20022, and anticipated real time, around-the-clock settlement, it is clear that a significant amount of change is coming to financial institutions that provide wire payments services.
The impact of around the clock wire processing on banking operations
In addition to the more obvious impacts, such as operations and customer service staffing, there will also be impacts to other facets of the business. For example, vendor relationships will be impacted because vendors will need to support banks and their customers on a back-to-back basis.
While all banks will need to conform to the same rules operationally, some will struggle to enable their end-to-end processes to work around the clock. Doing so impacts not only the payment system, but core banking channels, and every other component and department involved in providing payment services.
These challenges are similar to those experienced by banks that provide real-time payment services like The Clearing House (TCH) RTP. Banks that have already worked through the challenges associated with RTP will be better positioned to seamlessly adapt to the future of wire payments.
The move to ISO 20022 is more complex than many banks realize
Since the shift to ISO 20022 is more complex than many banks realize, it will have a larger impact on the industry than many financial institutions currently expect. Some view the shift as just a format change that can be addressed by simply translating messages, but this is not the case.
ISO messages allow for substantially more data to flow with transactions (e.g., remittance data, extended payee information, supply chain data, and so on). While financial institutions can opt to just translate messages to the new format, that is not a viable response in the long term. While there will be backward compatibility initially, this won’t necessarily be the case in the future. It is likely that there will be evolving mandatory fields, which will have to be understood by the payments systems in place.
Payments systems also need to have the ability to process the extended data, as its possible that something as simple as the recipient’s email address or invoice contents could trigger a sanctions warning—and if that gets truncated in a translation step, banks risk being out of compliance. Thus, it is particularly important for financial institutions to take advantage of the rich payment data that ISO 20022 enables, as opposed to just translating messages in and out of older formats.
Can current payment systems handle these requirements?
The short answer to this question is no, as many current systems were put in place a decade or longer ago. In other words, they were built to handle substantially lower transaction volumes and cannot support real-time or around-the-clock operations. On top of that, their data models are not compatible with ISO 20022.
Banks do not realistically have the option to stick with their current systems, which would require major upgrades to be compatible with an up-to-date wire system. Instead, they will need to work to push past the limitations of their current technology to keep up.
Payments as a service in the cloud: A new approach to wires
An alternative solution to legacy in-house systems is payments as a service in the cloud, and more specifically, wire processing in the cloud. The cloud offers a slew of benefits that legacy systems do not, including:
- Business resiliency, delivered by technical resiliency
The technical resiliency and around–the-clock operability of cloud-based payments services means there are no more missed, duplicated, or delayed payments, and banks can have more confidence in meeting customer service level agreements (SLAs). Another distinctive advantage of cloud-based services is their ability to have multiple active instances. In an era where business continuity can be dramatically impacted by extenuating circumstances like pandemics and natural disasters, these are very important advantages.
- Cost savings
Cloud-based payment services can deliver cost savings of 40% or more and eliminate large upfront costs in favor of operating costs, as they are largely based on “pay as you go” or subscription models that favor opex over capex.
- Accelerated onboarding and time to value for new services
Cloud-based payment processing services that provide support for handling proprietary corporate payment file and statement format integrations can significantly accelerate customer onboarding, cutting the time it takes to bring on a new corporate customer from months to weeks or days.
- Future-proofed operations
PaaS makes it substantially easier to handle continuous operation and ISO 20022 compatibility. The extensible nature of cloud services also makes it much simpler to implement new payment rails like TCH RTP and other future payment options.
Wire processing as a service in the cloud offers financial institutions a number of benefits, including allowing them to better enable ISO 20022 messaging and adopt around-the-clock settlement.
To learn more about how payments as a service can transform your wires business, get complimentary access to a webinar recording entitled, Why it’s time for a new approach to wire processing, featuring speakers Marie Garvey, VP Product Management, First American Trust; Vinay Prabhakar, VP Product Marketing, Volante Technologies; and Tushar Puranik, Managing Director, Deloitte.