Are you prepared for the digital banking tsunami?

Whitepaper

Here, we examine the threats and opportunities presented by upcoming regulatory changes, emerging technologies, shifting customer expectations, and a flood of fintech disruptors and non-traditional players entering the arena.

October 11, 202412 mins

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The banking industry stands at the threshold of a digital revolution that promises to reshape nearly every aspect of its business. From payment systems to customer experience, fraud prevention and open banking, technological change is sweeping through the sector. For banking executives, the question is no longer whether to embrace digital transformation but how quickly they can adapt to survive and thrive in this new environment.

As BAI aptly noted in its recent Modernizing Payment Methods report, “Digital banking is firmly positioned as the foundation of the new financial services industry. But how banks innovate will determine whether they can meet account holder expectations, compete with traditional and nontraditional organizations, realize their growth goals, and, ultimately, survive.”

A half dozen trends are driving the digital tsunami. Here, we examine the threats and opportunities presented by upcoming regulatory changes, emerging technologies, shifting customer expectations, and a flood of fintech disruptors and non-traditional players entering the arena.

The ISO 20022 imperative: Upgrading payment infrastructure

One of the most pressing challenges facing banks is the looming March 10, 2025, deadline to comply with ISO 20022. Institutions must upgrade their wire transfer systems to provide richer data, enable domestic and cross-border interoperability, improve existing processes, add new services, and keep US payment systems on pace with the rest of the world. The standard covers hundreds of message types as well as standardized definitions of business concepts, data types, and message concepts.

ISO 20022 is a paradigm shift in how financial messages are structured and transmitted. The standard allows for more detailed, structured, and consistent information to be applied to each transaction, enabling improved straight-through processing, enhanced fraud detection, and better regulatory compliance. It promotes seamless communication and interoperability between systems and organizations to reduce costs and speed up transaction times. Its richer and more structured data format enables better data analytics and reporting, and the standard is extensible to accommodate a wide range of products and services.

As with any new standard, not everyone will be ready. A 2023 study by Seeburger found that only 63% of institutions impacted by the regulation are likely to meet the 2025 deadline. Small banks are the least likely to be prepared.

The banking industry stands at the threshold of a digital revolution that promises to reshape nearly every aspect of its business.

For banking executives, the transition to ISO 20022 is both a technical challenge and a strategic opportunity. Banks that successfully implement the new standard will be better positioned to stay ahead of their competition, offer innovative services, reduce operational costs, and compete in an increasingly global financial ecosystem. They will process transactions more quickly and provide better reports to customers and regulators.

However, the complexity of the transition shouldn’t be underestimated. Legacy systems must be overhauled or replaced, staff trained, and processes redesigned. Ensuring seamless integration with existing systems such as core banking platforms, payment processing solutions, and customer relationship management systems will require extensive testing. Existing data formats must also be mapped to the new standard to ensure compatibility and consistency.

Banks that have yet to begin their ISO 20022 journey are already behind the curve and risk facing significant operational and competitive disadvantages if they fail to meet the deadline.

New frontiers in instant payments

Many banks may find that migrating to the ISO 20022 standard also presents an opportunity to adopt the new real-time payment standards promoted by the Federal Reserve and The Clearing House. Both facilitate instant transactions, but they have distinct characteristics and benefits for banks.

FedNow was developed by the Federal Reserve and launched in 2023. It aims to provide nationwide reach with 24/7/365 availability, instant settlement, enhanced data capabilities, and improved liquidity management. The launch of FedNow is considered a transformative development in the US banking landscape. It promises to make instant payments fast and convenient for American households and businesses. Previously, such transactions were handled by third-party applications like Venmo, PayPal, and the Zelle service operated by a collaboration of banks. Now, instant payments have the backing of the Federal Reserve.

Real-Time Payments (RTP) was launched in 2017 by The Clearing House. Like FedNow, it supports instant payments around the clock. Both systems adhere to ISO 20022 standards and are available to nearly every federal-insured depository institution.

While adopting FedNow or RTP isn’t mandatory, banks that choose not to participate risk being left behind as customers increasingly expect real-time payment capabilities. As of the end of June 2024, more than 800 financial institutions in the US have adopted FedNow and 570 use RTP.

There are numerous challenges and difficulties in implementation. Legacy systems that were not designed for real-time payments will require expensive upgrades. Achieving interoperability with payment systems such as ACH, wire transfers, and RTP is technically challenging, particularly for smaller institutions. Smaller banks and credit unions may find the costs of technology, training, and maintenance associated with implementing FedNow and RTP prohibitive. Additionally, consumers and businesses must be educated about these new standards and build trust in them. Even then, behavior can take years to change.

Real-time payments potentially increase the risk of fraud since transactions are irreversible. Ensuring the security of sensitive financial data is paramount as FedNow and RTP transactions traverse multiple platforms and institutions. Any downtime or technical glitches could have widespread consequences, disrupting payments nationwide. Successful implementation also requires coordination between the Federal Reserve, financial institutions, payment processors, and other stakeholders. Aligning the interests and goals of these diverse entities can be challenging.

No trend has the potential to disrupt traditional banking as profoundly as Banking-as-a-Service, allowing nonfinancial companies to offer banking services directly to their customers.

The early adopters who confront these challenges head-on will be well-positioned to expand service offerings built on instant payment processing and reconciliation while reducing operational costs. Instant payments also improve cash management and reduce the risk of overdrafts and other liquidity problems.

Adopting either FedNow or RTP can significantly enhance a bank’s service offerings, operational efficiency, and competitive positioning. While both systems provide real-time payment capabilities, the choice will depend on existing infrastructure, strategic goals, and customer needs. Many banks intend to offer both.

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