“If it ain’t broke, don’t fix it.” While there is a great deal of wisdom in this old aphorism, it isn’t an approach that I would advocate for banking infrastructure.
I don’t believe current banking infrastructure is ‘broken’, necessarily, but we must accept that it was built for a different set of realities. It’s not so much a fix that’s required as a transformation.
Many banks are operating on legacy platforms that go back 20 or maybe 30 years, when the idea of real-time transactions taking place 24 hours a day, seven days a week had never been considered. It’s no wonder that these systems aren’t capable of handling that transactional activity or managing the necessary liquidity in that type of environment. But with the launch of FedNow in July last year, banks are having to adapt to a new landscape very quickly.
All of these stressors being placed on traditional banking infrastructure are forcing banks to reevaluate how their technology is architected and if it’s fit for modern day purposes. On top of this, banks also need to assess whether the approaches that they took in the past — namely centralized databases and in-house, horizontally integrated infrastructure — will be viable in the future.
How banks are reacting to the new reality
The more forward-looking banks are looking to create a composable set of systems and architecture that allows them to plug-and-play best class components into their infrastructure rather than sourcing from a single provider. They don’t want to be tied to monolithic systems that are so deeply interconnected that making small changes requires the entire environment to be shut down; instead, they want to be able to make tweaks and adjustments any time they need, ripping out things that don’t work and replacing them with newer modules when appropriate.
These components aren’t entirely of their own creation now, either. While banks will still have proprietary technology within their platforms, they are also likely to be using components built by third-party providers. Sometimes, too, these components sit outside of their own firewall. These banks have accepted that embracing the wider ecosystem rather than taking a hermetic approach is the best way forward.
There’s also been a change of attitude towards technology investments. Rather than making a massive, up-front payment for infrastructure, they want to spread it out so it’s more in line with their operational costs. Subscription-based Software-as-a-Service (SaaS) models make it easier for banks to align their expenses with their operational income, allowing them to function more efficiently.
The customer is always right
While changes in back-end operations are usually something that customers aren’t aware of, it’s the needs and desires of clients that are actually driving these changes. After all, they are the ones demanding always-on, real-time transactional capabilities. The impacts that customers see from these transformations are largely positive, which is obviously great from their perspective, but they’re unlikely to appreciate just how many hurdles and obstacles banks need to overcome in order to provide these services.
As well as overhauling legacy infrastructure and taking a new approach to how they use and pay for technology, banks also need to manage liquidity in a different way to cope with the real-time payments environment. How banks manage their liquidity on a 24/7 basis is going to be a massive challenge. It’s not something they’ve done in the past, and it’s not something that they’re structured to do.
An even bigger challenge, though, is fraud prevention. Whenever a new payments system is introduced, it becomes a target for bad actors who are looking for ways to exploit the system for their own ends. We’ve seen it with crypto, we’ve seen it with Zelle and most recently we’ve seen it with closed-end solutions like Cash App. The problem affects the payment industry as a whole, meaning efforts to combat this fraud will need to be concerted and coordinated in a way that will ultimately be effective, but the last thing a bank wants is to be the weak link that these criminals target.
Optimizing infrastructure for modern-day banking
For banks that are still in the process of digital transformation, there are still more areas that will need attention if they want to reduce the number of headaches they suffer — and boost their chances of success — in a real-time payments environment. Things like OFAC checking and anti-money laundering checks will need to take place on all transactions and these aren’t necessarily easy to implement into legacy architecture.
Cloud platforms and microservices represent a way for banks to take the strain away from their existing systems while offering a great degree of agility too; not just in terms of flexibility when it comes to adding components but scalability as well. Cloud platforms can help deal with the load, but banks shouldn’t be fooled into thinking that the cloud is the answer to all of their problems.
The problem with cloud providers is that any downtime could affect a bank’s ability to process real-time payments. While cloud providers are generally pretty strong when it comes to providing a consistent service, banks can’t be 100 percent certain that the cloud will always be there, and if it does go down, then they have no control over getting their services back online again. However, using a multi-cloud approach — where payments are handled by more than one cloud provider with all messages simultaneously recorded and cross-checked on each cloud — offers a belt-and-braces solution for banks that don’t want to get caught with their pants down.
When it comes to services that are as important as payments, banks need to be certain that they have taken every measure possible to fulfill their obligations to customers. Regulators, too, will be keeping a close eye on all cloud-based payment services, and it seems inevitable that they will insist that banks take a multi-cloud approach at some stage in the future.
The launch of FedNow was arguably the biggest change the banking industry has seen so far this century. Driven by consumer demand — which itself was shaped by the recent pandemic — banks are faced with some very big challenges right now.
Modern problems require modern solutions; that’s why the banks that upgrade and future-proof their core infrastructure by looking to third-party providers and cloud platforms will have the best chance of thriving in a real-time world. Those that don’t accept the need for change, or are too slow in their transition, will be the ones that fall by the wayside.
Dave Scola is chief executive for the US operation of Form3, a leading cloud-native payment technology. Scola leads Form3’s expansion into the US market as the company continues to build its product capability to include Real-Time Payments and Automated Clearing House connectivity with both the Federal Reserve and The Clearing House.