Payment Hubs Can Help Financial Institutions Modernize Payment Processing

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Believe it or not, some banks and credit unions are still processing payments using approaches that were cutting-edge 25 years ago when Britney Spears ruled the airwaves.

While the payments landscape has changed dramatically, the underlying infrastructure and processes at some financial institutions haven't always kept pace.

"We have a lot of financial institutions out there that are probably still processing payments very similarly to how they did 10 or 15 years ago, and in today's environment that's just not really optimal." said Mark Dixon, Nacha Senior Consultant.

That's why now's the time to consider a payment hub. What exactly is a payment hub?

"It creates an orchestration layer, if you will, a centralized layer across all the payment rails," said Chetan Cariappa, SVP, Payments Strategy, Intellect Design Arena. The results, Cariappa said, include "operational efficiencies and better cost models that a bank might be looking for."

Dixon noted that standardization is a key feature of payment hubs "so that you can process things in a very efficient and similar way, if you're thinking about across multiple payment channels," as opposed to "in some of these older systems that's just not the way it is … it's very fragmented."

Those old existing silos just won't cut it anymore, Cariappa said, warning that any financial institution that's "looking to scale up by adding to the silos that already exist, they're going about doing it the wrong way. They're going to add to their operational costs. They're going to add to all the complexity that's already there. It's not moving the needle in the right direction."

Instead, Cariappa said, "You want to be able to move to a platform that unifies those payment rails together." Change should also position a bank "to be able to be in a position of scale as technology changes."

Cariappa and Dixon were joined on Nacha's Payments SmartCast podcast by J.D. Penner, Wholesale Banking and Payments Practice Lead, Intellect Design Arena, who cautioned banks not to overlook the experience they want to create for clients.

"I think that sometimes is overlooked, because we're so often talking to the technology side of the bank that sometimes the business case is lost a little bit on why we are doing this and what's the benefit," said Penner.

Penner added, "You can think of the payment hub as a conductor, and it operates as an orchestra with different players all doing different jobs at different times. The payment hub keeps track of everything and makes sure everything is operating appropriately."

Cariappa said a key feature of any payment hub should be that the customer doesn't have to decide how to actually send a payment. "Let the customer not even know which rail it's going to go out on-whether it's instant payments, or wires, or ACH-as long as he puts in when he wants that payment to get there, what the value of the payment is, what kind of cost he's willing to pay," said Cariappa.

"Let the bank make the choice on which rail it should go out." Nacha Consulting works with a wide range of payments industry participants, including payment hub providers, to strengthen compliance, manage risk and implement industry best practices.

Schedule a free, 15-minute consultation to learn how Nacha Consulting can help your organization enhance its payment operations and risk management practices.

Much more was discussed, and you can listen to the complete podcast below.