We live in the age when speed of sharing information and financial data is critical. Volatile markets, high-liquidity businesses and innovative open banking apps – that’s what defines the XXI century finance. Here’s why you should bother about faster settlement times and implementation of open banking practices in 2024.

What Makes Fund Transfer Speed Important

One doesn’t need to go back too far in history to realise that the number of electronic transactions occurring each day has grown dramatically in recent years.?

Let’s take a look at the annual statistics of commercial automated clearing house (ACH) transactions provided by the U.S. Federal Reserve for illustration. The volume of transfers has changed from 741 million in 1989 to 18,8 billion in 2023. That translates into an average daily transaction volume of over 75 million last year vs just 3 million in 1989. Even in 2010, the daily transaction volume was almost twice as low (40,6 million). The value of such transactions has also increased tenfold within the last three and a half decades.?

This may be an example of a single country and just one of the available payment processing methods, but you can surely observe the ongoing trend. There are many more electronic fund transfers today than ever before and their value is growing.?

The receiving side might be an individual, a business, or a public entity. Either way, they all require a speedier transaction clearance. Following the example of ACH, today most credit and debit transactions processed through the system clear on the same business day. In the recent past, the process typically took a few days. Why is there a rush?

Well, the reasons are numerous and versatile. When it comes to individual transactions, faster transfers help people meet urgent and emergency expenses or meet their financial obligations on time. Businesses strive for improved cash flow management, enabling them to keep operations smooth and avoid delays in service or production.?

In volatile markets, or with cross-border transactions, high speed of a transfer means you get what you expect at the time. On the contrary, any delays in such fund transfers can increase financial risks, resulting in losses due to exchange rate fluctuations or sudden market changes. Slow transaction processing is one of the main cross-border payment inefficiencies that hinder business growth. Quicker transfers minimise delays in cross-border e-commerce, which is common nowadays, helping companies maintain solid relationships with international clients and suppliers.

Quick access to funds can make a difference in time-sensitive situations, such as when individuals and businesses have to make immediate financial decisions. It can be investing in limited-time opportunities that require rapid action or paying the supplier that provides better services. With fast transfers, one can avoid overdraft fees or bounced payments easier or secure a property at a favourable price before the competitors. For legal settlements, insurance claims or bail payments, time can be critical as well.?

Besides, as the same day or real-time payments gradually become the norm, customers increasingly expect instant or fast settlement. Absence of such an option might result in dissatisfaction and even loss of customer loyalty.

How Fast Should Fund Settlement Be?

When we speak of acceptable settlement speed, the answer is simple – the sooner the better. It is true for all types of transactions and all financial institutions strive to speed up the process.?

For instance, this May, the norms for settlement cycles on stock and security trades in the U.S. went from two days to one. Today, most broker-dealer transactions in the U.S. securities market occur in 1 business day.?

The U.S. Federal Reserve also launched its long-awaited instant payments system FedNow last year to modernise different types of payments (P2P, B2B, A2A, C2B, etc). Thus, American banks and credit unions can now provide their customers with access to instant payments through new features on their open banking apps, banking websites, or other interfaces. Though about 900 financial institutions have already joined the initiative, a lot of banks haven’t signed up, including some of the nation’s 10 largest banks (e.g. Bank of America, Citigroup, PNC and Capital One Financial).?

However, each settlement method still has different timelines. For example, wire transfers are usually settled within hours, while credit card transactions settlement is completed within one to three business days.?

The existing standards define client expectations. It may seem that most customers or institutions must be ready to tolerate a few working days to access their funds. However, it’s not true as soon as they receive a quicker alternative. Many of those faster options are provided by third parties, such as fintech service providers and available through open banking apps.?

Open Banking Disrupts Traditional Transaction Processing

Open banking is transforming the financial industry by allowing third-party providers to access bank customers’ data through secure APIs. By providing alternative services, fintechs and other non-bank entities increase pressure on traditional banks to innovate and improve their services. The changed financial landscape is driving faster transaction processing, better user experiences, and more personalised financial solutions.

The point is not only in the increased competition and variety, though. Third-party fintech companies disrupt legacy payment practices with innovative technologies. Thus, open banking apps may allow for instant, account-to-account payments directly from customers’ bank accounts without the need for intermediaries like card networks or traditional payment processors. Such direct fund exchange reduces processing times and eliminates additional costs associated with intermediary fees.?

Unlike traditional transaction processing, open banking transactions rely on secure APIs, which may verify the authenticity of a money transfer quicker and with reduced false positive rate. On the other hand, many banks continue to rely on traditional payment processing systems that may lack compatibility with newer technologies and modern systems. Those legacy systems may employ overzealous fraud protection means with static rules that don’t account for user-specific behaviours or changing contexts. They may also have limited consumer profiling which often leads to mistakenly blocking legitimate transactions or double-checking them. That contributes to slower processing times as well. With open banking solutions, institutions can overview all customers’ financial accounts and transactions across different institutions in one place, making it easier to create a complete and insightful customer profile and better determine which shopping behaviour is truly deviant.?

In addition, open banking creates a more efficient system for cross-border payments. Allowing third parties to leverage foreign exchange data paves the way for customer access to transparent, real-time exchange rates. Meanwhile, traditional banks often impose high fees and employ too many intermediaries in the process which leads to further delays for international transactions.?

Faster, more affordable international transaction processing solutions make cross-border payments easier, faster, and cheaper, benefiting both businesses and individuals who make frequent international transfers for remittance purposes, to pay suppliers, clients or employees.

The Combination of Fast Settlement and Open Banking Creates a Win-Win Situation for All Stakeholders

All the participants of the financial ecosystem benefit from improved transaction speed and leveraging open banking solutions.?

Thus, businesses involved in e-commerce can instantly access their money after a transaction, rather than waiting days for funds to clear. These funds can be further invested in replenishing the inventory stock, business improvements, payouts to partners and suppliers, etc. Besides, open banking allows businesses to bypass intermediaries in payment processing, reducing fees and transaction costs. It leaves more money for growth, innovation and expansion rather than simply maintaining daily business operations.?

Meanwhile, end customers are satisfied with their growing demand for speed and convenience being met. With open banking apps, they get greater visibility into their bank accounts. They can view all their finances in one place, making it easier to manage money and track spending. Moreover, fast settlements provide users with real-time insights into their finances, helping them make informed financial decisions.

Furthermore, fintech companies and banking institutions get the opportunity to develop new customer-oriented solutions that leverage instant payments and real-time open banking data, such as budgeting tools, personalised lending products, and smart savings options. They benefit from increased customer loyalty, process automation, simplified business processes, and dealing with fewer payment processor intermediaries. Besides, financial institutions can create new revenue streams by offering premium services, such as instant transfers or account aggregation, for an additional fee.?

Last but not least, the overall interconnection of financial services brought by open banking and fast settlement allows money to move through the local and global economies more seamlessly and quickly. Economies on the whole gain better liquidity and dynamics. Enhanced money flows contribute to business and job growth, and fuel economic development. Meanwhile, the variety of bank and non-bank financial services improve financial inclusion levels and create a broader range of tailored financial services.?

All in all, faster settlement and open banking capabilities make financial services more inclusive and efficient and bring significant benefits to all parties involved. It is important to develop related solutions and tools in 2024 for a better future of global finance.?