Community banks need to make a plan to upgrade their current core system to one that handles real-time processing in order to stay competitive. It is crazy the amount of cost and energy our bank (like almost all banks) spends on mimicking a real-time environment, the risk associated with such and how much of an operational hindrance a batch environment is. Consider that in the next three to five years banking will be a 24/7 activity and community banks will not be ready.
Putting Real-time Processing In Your Plan
If real-time processing isn’t in your strategic plan, it should be, as the time to start planning is now. It is no easy task and migrating to a real-time core is not only a multi-year project, but takes 3+ years of planning, as the move needs to be coordinated with a variety of other systems (online banking, storage, security, etc.).
Many European and Asian banks are already working with real-time processing and about seven banks in the US are well underway. Citibank and BBVA Compass are two of the most notable, but we predict all others will follow; it is only a question of when.
The main reason to move to real-time processing is a combination of more operational flexibility, security, compliance and speed. It is embarrassing that we really don’t know the exact balance in a person’s account until all transactions are cleared the next day. Being able to aggregate and process items from online banking, checks, wires, remote deposit capture, debit cards and a variety of other areas now happens in a batch environment, but that is a huge limitation for banking operations for the future.
Traditional bankers may struggle to get this concept since lagged processing is how banking has been operating for the past 224 years. In this age of digital payments the velocity of money will only increase, furthering the requirement to go real-time and to know the exact balance in the account. Real-time processing makes rolling out new products much easier since you no longer have to architect the product to run on contra (temporary or memo posted) balances and then settled with a day lag.
The lag creates all sorts of problems including unintended credit extension, inefficient use of float balances, prioritization of payment processing, inaccurate customer information (impacting service) and, of course, compliance. Any bank that has tried to roll out a person-to-person or business-to-person payment application knows how having a number of smaller debits and credits create a myriad of problems without real-time processing. Just figuring out what your hold policy is creates an operational nightmare. This is to say nothing of trying to go to an omni-channel environment where banks have to carry a transaction from an online environment to mobile and maybe to the branch.
How Real-time Processing Helps
All the above hassles get eliminated with real-time processing, as the risk of overdrafting an account and the associated compliance drops to zero once paper items go away. This is to say nothing of the enhancement in security and scalability, as now 16k plus transactions can be processed and algorithmically fraud checked per second. Currently, banks have to set up a variety of fraud/security systems at each channel that are often independent instead of running the security layer on all transactions in real-time.
Real-time processing is much cheaper, as you no longer need the personnel or hardware (processing servers) to run and verify the batch processes. Reprocessing, reconciliation and exception handling drop dramatically and duplication in security systems goes away. For banks that have moved over to real-time processing, cost savings have dropped 20% to 30%.
Given the cost and importance of core processing, banks that operate in a real-time environment will also have a huge competitive advantage when it comes to M&A. Not only will they have a more scalable and cheaper operating environment to make more transactions accretive, thus giving the bank more acquisition choices, but the cost of implementation will drop and acquiring banks no longer have to figure out the workflow for each type of transaction flow. With real-time processing everything becomes standardized and gets processed in the exact order of occurrence.
The concept of “banking hours” will soon become antiquated and only banks that process in real-time will be able to take advantage of this change. As an industry, we should allow our customers to send AND clear payments 24/7. Real-time core processing is standard in 35 other countries while the US is falling behind. Banks that want to go global or even take advantage of real-time payment system’s like FIS’s PayNet will struggle more and more to adapt if we leave this issue for the next banking generation. It will take years for your community bank to go real-time but the time to start planning is now. This is a huge strategic shift in both thinking and operations. Real-time core processing is a much safer and easier environment to work within and is an idea whose time has come.
Submitted by Chris Nichols on January 05, 2015