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Real time and the race towards it

Matthew K. Lessig | VP Next Generation Banking , FIS

March 22, 2021

All computer systems are subject to response constraints, but real-time systems feature ultra-low latency where response times can be guaranteed within the order of milliseconds or microseconds. In software engineering terms, real-time computing is used to describe systems that are subject to a real-time constraint; in other words, from the time of an action or event taking place to the time of the system’s response to that action or event. So, if a system can effectively guarantee its response within the specified time constraints, then it can be described as a real-time system.

In banking the goal of real-time technology is to decrease the time between data transmission (e.g., a customer withdrawing funds from an account) and the action that emanates from it (e.g., the system reducing that account’s available balance by the amount of that withdrawal) -- to the point of being essentially instantaneous.

Financial markets and exchanges have long been interested in the advantages of real-time data and have invested heavily in real-time technology to drive competition, boost innovation, reduce fraudulent activity, and to ensure an orderly market. Banks are now moving to real time for those same reasons, and to align banking with today’s always-on 24/7 world.

Cash – the original real-time payment

In banking, real-time value exchange has been around as long as money itself. As the original medium of exchange, notes and coins offer immediate, irrevocable transfer of value. In many ways, the move to real-time processing seeks to replicate an analog past when cash was the main means of payment.

The general acceptance of cash means that it offers payment certainty. People trust cash and it enables trade to take place with relatively low friction. Individuals and businesses can also hold on to cash as a means of deferred payment or as a store of value. Physical money also has the appeal of being portable – people can carry it with them and use it to pay for virtually anything, anywhere.

However, cash has downsides too, and its portability is also a weakness when it comes to security. People are increasingly adopting digital payments and the COVID-19 pandemic is accelerating uptake.

Checks, credit cards and deferred payments

It is perhaps ironic that as financial services became more advanced and sophisticated, delays were introduced. New financial instruments, such as checks, promissory notes and credit cards meant that settlement was delayed.

Computing made new things possible, such as electronic payments and funds transfers, but most computers were batch-based so electronic payments and funds transfers had to be scheduled in advance. The batch processing setup has remained the mainstay of bank processing, however bank digitalization calls for a new approach.

Why is the world racing towards real time?

There are many drivers of real-time processing:

  • Customer expectations. Banking is often found to be lagging behind in an increasingly digital world. According to an Accenture study, 87% of banking executives acknowledge that customization and real-time will set the tone of competitive advantage in the future.1
  • Technology. Improved communications make real-time processing from anywhere a reality. Low-latency data transmission and exchange is approaching ubiquity and becoming mainstream in everything, from ordering food to streaming a movie or transferring money from your bank or credit card to pay for the food and the movie.
  • Mobile payments. For mobile payments to operate as a credible cash replacement, real-time processing is essential to fulfill the obligation of an immediate irrevocable transfer of value, as well as portability and convenience.

The combined forces of bank regulation and the emergence of mobile and contactless payments compel most banks to deliver real-time payments. But, for banks with legacy technologies and batch-based processing, this has been a challenge.

Real time vs batch processing – complements or substitutes?

Given the strategic benefits it seems likely that all banks will eventually want to implement a real-time system architecture. What does this mean for batch processing? Real time and batch may be substitutes but they are also highly complementary, each has unique benefits, and the can run in parallel when appropriate.

Batch processing remains a highly cost-effective way of processing large groups of items, including scheduled payments, such as salary runs or check clearing files. A real-time system operating on top of, or in parallel to a batch system can offer many bank benefits. From a strategic perspective, the sharing of real-time and batch systems is important because it offers the opportunity to align a progressive bank transformation with business benefits, to deliver a smooth transformation that controls cost and mitigates risk.

Getting started

Although most banks have already implemented some real-time processing, for example to deliver instant payments, this is only a start – a true move to real time involves a massive transformation that changes how work gets done. The move to real-time is a crucial decision that affects all areas of the bank. Real-time processing is a major element of a bank’s digital transformation strategy and can be considered in parallel with other transformational constituents.

An informed business choice

There is no need to rip and replace the core banking platform to gain the benefits of modern real-time solutions; the transformation can be incremental. Options may include a small-scale re-architecture of the core to extend its life while implementing a progressive modernization. This “hollowing out” of the core has become a popular way to implement a progressive digital transformation driven by business benefits

Application program interfaces (APIs) can play a crucial role in effecting the move to real time, by enabling disparate systems to be choreographed in real time. With the right API strategy, a bank can bring new products to market more quickly and participate in a growing financial ecosystem that’s increasingly real time.

An expert partner

FIS has helped banks of all sizes from around the world implement real-time technology. Our solutions are constantly proven in some of the world’s most demanding banking environments.

1 Accenture Banking Technology Vision, 2019