Real-Time Payments Requires Firms to Embrace the Modern Cloud

Time is money, and more consumers and businesses want instant payments.

Worldwide, the transaction value of real-time payments is predicted to soar 289% by the end of the decade, from $97 billion this year to $376 billion in 2030.

Responding to that demand, in July the Federal Reserve launched FedNow, a new instant payment infrastructure. FedNow allows banks, credit unions, and other providers to offer services that enable individuals and organizations to send and receive payments in mere seconds, 24/7.

The new capability has the potential to roil the market as industry players jockey for position with new bill pay, account-to-account transfer, and other products. It will also likely scramble technology budgets as firms take a hard look at their systems to make sure they have the capabilities and capacity to meet customer requirements.

But FedNow is just the latest in an avalanche of industry changes that has disrupted the market and raised the bar on technology. All of these developments point to one conclusion: that financial services companies must finally fully commit to a cloud-native payments system. Only a modern cloud platform will give firms the cost-efficiency, scalability, portability, and flexibility they need to serve today’s customers and compete in today’s market.

The Cherry on Top of Constant Change

The payments market has endured ongoing upheaval over the past six to seven years. Much of the turmoil has come from fintechs and Big Tech vendors such as Apple, Google, and Samsung, disintermediating traditional financial services companies with new payments products. These startups and technology-first behemoths have ushered in new ways of interacting with customers and have raised expectations for speed and ease of use.

At the same time, new regulatory and cybersecurity requirements have sounded a continual drumbeat. These range from rules like the European Union’s Payments Services Directive 2 (PSD2) and forthcoming PSD3, designed to give consumers more control and make payment providers more accountable. They’re also meant to cyber safeguards like two-factor authentication (2FA), a validation mechanism to reduce the risk of fraud.

FedNow will accelerate funds transfer from the three to five days required for Automated Clearing House (ACH) transactions to near real time. It will also provide the digital plumbing to permit older banks and credit unions to participate in the payments market.

But FedNow-enabled real-time payments won’t just allow firms to offer new customer-facing services. They’ll also require changes that ripple throughout the organization. For instance, per-transaction costs and fees will change. So will the way liquidity is managed. Because risk of fraudulent transactions will increase, organizations will have to invest in stronger validation and security. And because transactions will occur faster and more frequently, many firms will need to boost the performance and capabilities of their core systems.

This last requirement could be a stumbling block, because many organizations still run their core processes on decades-old legacy systems. Those systems weren’t designed to accommodate the flexibility and rapid change required in today’s market. It’s time for those systems to go.

The Case for the Modern Cloud

How should organizations respond? Not by thinking about technology first, but instead, by starting with customer demands—for speed, convenience, and flexible new services. This customer-first mindset will point to the right technology platform that positions you to rapidly bring new products to market and deliver superior customer experiences, while still maintaining strong security and resilience.

Your firm might already have migrated some services to the cloud, but if you’re like many, you’ve resisted modernizing core systems because of concerns around cost, business disruption, security, and data sovereignty. It’s possible to take a progressive approach to cloud adoption that allows you to modernize components of your payments platform and run them where it makes the most sense—and these capabilities are enabled by a modern cloud platform.

A modern cloud platform is built around microservices, which organize software applications as a collection of small, independent, and loosely connected services. Each service handles a specific task, but together they provide complete functionality. This approach makes it simpler to continually enhance and scale applications. It also makes applications more resilient, because if one service goes down, it can be remediated while the other services remain functional.

A microservices architecture is enabled by capabilities such as:

Container management. Containers are standalone software packages that include everything needed to run an application, such as “libraries” of prewritten code and other “dependencies” required to make an application functional. Containers make it easier to build, deploy, and move applications from one environment to another. You can automate the deployment, scaling, and management of containers with a container orchestration platform. That enables you to balance loads across containers and scale containers up and down based on demand. It also permits you to run applications on-premises, in a public cloud, or in a hybrid of the two. The most common open-source orchestration platform is Kubernetes, which is maintained by the Cloud Native Computing Foundation (CNCF).

Event-driven architecture. This approach uses system events—such as a transfer of funds—to trigger and communicate among microservices. Event streaming lets you capture such events as they happen in real time, store them in an organized way, and share them across services and applications so they can respond immediately.

Open source. Open-source software is developed collaboratively by individuals and organizations and made freely available to the public. This approach fosters innovation, stability, and security. Open-source solutions are also more portable across cloud environments than proprietary offerings.

Advantages for Today’s Payments Marketplace

Some financial services providers might be concerned about the perceived cost and complexity of moving to a new platform. But open-source solutions are available from established, proven providers, with security and support. And the long-term benefits of open source can deliver a higher return on investment than proprietary solutions. Those benefits include:

Flexibility. With a cloud architecture built on open-source solutions, you can develop, deploy, and consume payments and other core banking applications across on-prem, public cloud, and edge infrastructure. This agile, modular approach can help you more quickly and easily respond to shifting customer preferences, tightening regulatory requirements, and disruptive new competition.

Portability. An open-source, microservices approach means you aren’t locked into a single cloud environment. You can run in a cloud environment that’s on-prem, public cloud, or both. You can also migrate quickly from one environment to another as your needs dictate.

Security. Popular public cloud offerings include security controls, but payments providers typically require customized configurations to comply with strict industry regulations. Mature, proven open-source solutions deliver the robust security required for core banking systems. And on-prem private clouds ensure data sovereignty, reducing your cyber risk. You can also benefit from open-source products that automate security functions across hybrid cloud environments.

Resilience. The cloud can offer enterprise-grade resilience and business continuity. But relying on a single cloud provider can increase the operational risk to your business. Building on an open, modern cloud foundation can help prepare you for the unexpected. You can consistently and repeatedly adapt and scale so that your operations and your business remain resilient in the face of market changes—like the advent of the FedNow instant payments infrastructure.

As you pursue a modern cloud strategy, keep in mind that your major decisions should be less about technology and more about your business. Identify your business needs and define the business outcomes you’d like to achieve. That will enable you to measure progress toward your goals.

Then you can define the technology principles and approaches that will serve as a cloud road map across your organization. With a modern cloud architecture based on microservices, container management, an event-driven architecture, and open-source software, you’ll have the foundation to deliver new real-time payments solutions, maintain security and resilience, and achieve value for both your customers and your business.