The Payments Stack is a Tech Issue and a Management Problem

The Payments Stack is a Tech Issue and a Management Problem

April 18, 2024

By: Tyler Brown

Payment Hubs and Instant Payments

The top reason banks globally would invest in payments system modernization would be to reduce cost, ranked first by 48% of respondents, according to research by Finextra. Another 26% ranked limiting system risk first. They’re part of the same problem: The age, complexity, and fragility of financial institutions’ (FIs’) legacy tech stacks make maintaining them an ordeal, let alone upgrading or replacing technology. In North America, in fact, limiting system risk was organizations’ top priority, ranked first by 33% of respondents, according to the research. “Deployment of new technology or significant upgrades of current systems” was the most popular budget priority.

These issues long predate modern payment rails, and massive disruption in payments technology is giving FIs a nudge to modernize. Most US banks use decades-old batch-based payment processing technology, according to Payments Journal. But with more rails — particularly instant payments — and the arrival of the ISO 20022 messaging standard, FIs need to make their payments stacks comprehensive, adaptable, and efficient. With modern, application programming interface (API)-native, cloud-based payments stacks, they have a fighting chance at moving on from fragmented, outdated systems.

Payment hubs, in particular, are on the leading edge of payments infrastructure modernization. They’re designed to solve integration, orchestration, and administration problems that grew out of payments modules added one-by-one over the years. With separate systems for ACH and wires, for example, FIs don’t have an easy time routing payments in ways that make the most sense for the customer or the FI. And ownership for the rails may be inefficiently split up between different departments. Payment hubs consolidate rails, formats, and channels, eliminating one-by-one connections to payment processors.

Key features of payment hubs include preprocessing, like handling fraud, sanctions, and liquidity checks; intelligently routing transactions to the ideal payment processor or network; optimizing costs based on the needs of the transaction; and support for all rails relevant to an FI’s operating environment. In the US, those rails include ACH, wires, FedNow, and RTP provided by The Clearing House.

The key point is that, as FIs contemplate payments modernization, developing a strategy behind those efforts (versus updating solutions piecemeal) is critical. Additionally, structural issues with the organization need to be considered. Money movement is a complex, holistic function across many business units. Calling each rail a separate product, managed by a separate team, doesn’t make sense when the concept of money movement is shifting from payment rails to intelligent routing based on need and cost.

As a bank’s senior management asks itself how to address relatively narrow topics, like connectivity to FedNow, it also needs to talk about bigger issues related to payments modernization and how those fit into the bank’s broader technology roadmap.