Faster payments is arguably one of the most important opportunities emerging on the U.S. financial services landscape. The push to bring real-time payments to the U.S. is already underway, driven by the global proliferation of real-time systems, changes in customer expectations, and three key regulatory initiatives: The Federal Reserve’s payment system improvement project; NACHA’s rules changes for same-day ACH; and the CFPB’s guiding principles on faster payments. When regulators turn their attention to a topic, it is a clear signal that the industry is moving in that direction. The wheels are in motion, and with this momentum faster payments are closer than ever to becoming a reality in the U.S.
Every financial institution, regardless of size or charter type, should plan for this disruptive and transformative opportunity. It’s not just about the speed of payments; banks can benefit from revenue, data and cross sell opportunities. Faster payments represent an unparalleled opportunity for financial institutions to remain at the center of payments, mitigating risk of being disintermediated by non-traditional players.
Characteristics of real-time payments
The Federal Reserve Bank’s Faster Payments Task Force defined 36 effectiveness criteria for faster payments, grouped into six categories: Ubiquity, Efficiency, Safety and Security, Speed, Legal, and Governance. These criteria are intended to provide payments solution developers with guidance on the desired attributes of future payment systems and a framework by which stakeholders can assess market offerings.
"There will be a number of transformations that will shift the course of payments in the coming years, but the race has begun"
It is important to distinguish between same-day ACH and real-time payments. NACHA’s same-day ACH initiative is a funds settlement process between financial institutions that will result in faster funds availability for transactions designated for same-day processing; however, it is still a batch process. Real-time payments, as currently configured, is a “good funds” model, where messaging occurs between financial institutions and the settlement process occurs, in most cases, through ACH. Basically, the good funds are set aside by the sending institution and settled via ACH same-day or next day. The real-time messaging allows for the receiving institution to make funds available to customers on a 24/7/365 model. Users will be able to send and receive payments at any time, with immediate funds availability. The impact on improved cash flow is meaningful for both consumers and businesses.
Examples of real-time payment use cases extend to most business models, including:
• Just-in-time payments to suppliers
• Immediate bill payments with acknowledgements
• Temporary employee wages
• Emergency payroll
• Urgent issues such as disaster relief or insurance claims
• Non-commerce payments, such as paying rent to a roommate
• Urgent account-to-account transfers (e.g., to fund investments or purchases)
• Immediate bill payments with acknowledgements
• Some e-commerce payments (e.g., utility bills)
• Immediate disaster relief payments with acknowledgements
Real-time payments promise numerous advantages for banks and their consumer and business customers. Real-time payments provide a way to satisfy evolving customer demands, including the expectation for immediacy. Faster payments offer financial institutions a path to product innovation and new revenue streams. Esther George, President and CEO of the Federal Reserve Bank of Kansas City, cited Federal Reserve Bank research that discovered “each year there are 29 billion payments for which real-time or near real-time delivery would be desirable to end-users. One-third of consumers and three-fourths of businesses want real-time payments, and they are willing to pay for them.” There are other advantages to be derived, such as protecting customer relationships and future revenue streams, cutting operational costs and gaining valuable customer data.
The race to real-time payments will be a marathon, not a sprint. It is reasonable to assume that real-time payments will cannibalize existing transaction volume to some extent. But as is the case today, consumers and businesses use a variety of payment methods, and we expect that to continue, even with the pervasive appetite for digital channels and the advantages of real-time payments. Not every transaction will require immediate posting and availability, such as payroll and recurring bill payments.
Based on the adoption pattern for real-time payments in the U.K. we should expect a gradual ramp up of transaction volume. Many experts project that the largest demand will be in business-to-business transactions, with significant growth in all use cases over the next several years.
What to do now?
Remember the Benjamin Franklin quote, “If you fail to plan, you are planning to fail”? Despite the fact that real-time payments in the U.S. is in its infancy, it is never too early to start planning. First and foremost, financial institutions need to consider the implications of faster payments as it relates to their overall payments strategy. The 24/7/365 high-availability requirements of real-time payments is a game-changer for a number of functional areas. Considerations include a wide array of issues impacting product management, risk management and compliance, operations, treasury management, and credit operations- just to name a few. And don’t forget to consider the customer experience, including training client-facing staff and educating customers about faster payments. Analyze customer needs and pain points to understand which customer segments may be the first to benefit from real-time payments and plan a strategic roll out accordingly.
Real-time payments call for both offensive and defensive strategies. If banks aren’t ready for faster payments, fintech companies may opportunistically try to fill the void to become the chosen providers for payments, potentially disintermediating banks or relegating them to a lesser role. Those institutions that are not ready at the right time with the right real-time payments solutions may jeopardize their competitive positioning in the marketplace, and risk losing existing revenue streams and customer relationships.
It is still early in the real-time payments movement in the U.S. As bank strategies to respond to this opportunity take shape, it is advisable to remain flexible to accommodate a changing marketplace. There will be a number of transformations that will shift the course of payments in the coming years, but the race has begun.