Getting Real
U.S. financial institutions and the Federal Reserve are ramping up efforts to provide faster payments solutions.
By Josephine Rossi
Although the United States has lagged behind its international counterparts in adopting a system of real-time payments (RTP), experts are watching with optimism as more U.S. stakeholders begin to engage in modernizing the customer experience for swift and easy payments.
Other nations have been quicker to get on board with fast-pay technology, mostly because of governmental mandates to do so. But a stronger strategy in the United States is unfolding as financial institutions and fintechs work to develop new solutions, The Clearing House (TCH) grows its RTP transaction volume, and now the Federal Reserve plans to launch its own service to propel faster payments in the United States.
Say What?
These recent developments are instilling confidence about the future of RTP among U.S. proponents. Still, sources say even basic conversations about what’s next for RTP can go south quickly because global and domestic markets are confused about what “real-time” or “faster” payments actually mean.
Compared to traditional payments, a “faster payment” is distinguished by the availability of final funds in seconds or minutes on a 24/7/365 basis, according to Dan Faxel, assistant vice president at the Federal Reserve Bank of Chicago and member of the Fed’s Strategies for Improving the U.S. Payment System team, who discussed the topic at the 2019 TRANSACT conference. “Even a wire today, although typically it goes pretty fast, you still have bank processing that takes it a few hours,” he told the audience.
Clearing and settlement define how Javelin Strategy & Research differentiates payments in its March study of 200 global payment methods. “Faster payments” are those that post and settle within 24 hours, while “real-time payments” post in less than one minute but take up to 24 hours to settle, according to the report. “Instant payments” post and settle “in a continuous cycle with all activities occurring in less than 60 seconds.”
“[Real-time payments] means something different everywhere,” says Krista Tedder, head of payments research for Javelin and co-author of the report. “For example, Japan is touted as one of the first to go real-time payments; however, they’re not. They’re batch, but they’re fine with that, and they’re happy calling it ‘real-time payments.’”
(For the sake of this article, we will use RTP as an umbrella term to encompass all variants in the current market.)
In its fifth annual “Flavors of Fast” report last year, FIS also measured the state of RTP around the world. It defined a “faster payment” as “interbank fully electronic payment systems in which irrevocable funds are transferred from one bank account to another, and where confirmation back to the originator and receiver of the payment is available in one minute or less.” FIS further limited the report’s scope by excluding card-based transactions, “niche real-time global settlement systems,” and “any payment system that includes paper origination.” The research also omitted cryptocurrencies.
The semantics confusion stems from the lack of a national definition or system of instant clearing and settlement, compounded by private companies trying to brand products to consumers with skewed perceptions, according to Tedder. She cites as an example Early Warning Services, which markets its Zelle peer-to-peer (P2P) payments service as RTP because money posts to the recipient’s account in less than 60 seconds. The funds, however, do not change banks for 24 hours via ACH or proprietary interbank rail, she notes.
Meanwhile, consumers do not necessarily know the difference unless funds are delayed, or they experience a problem. “They also think that paying with a credit card is real time, because they walk away knowing it’s paid,” she notes.
Bountiful Benefits
Even if they don’t fully understand the technology, consumers and businesses alike stand to benefit from faster systems of payment, say sources.
The most obvious value is to those living paycheck to paycheck in the United States. RTP adoption would go a long way to help alleviate income inequality, according to Aaron Klein, a fellow at the Brookings Institution, who submitted a letter to the Federal Reserve during its comment period on faster payments last year.
“In the aggregate, high-cost cashiers, ‘pay day’ lenders, and bank overdraft fees totaled around $34 billion of revenue in 2015 (collection fees would add to this),” he wrote in a blog post summarizing the letter. “There are no precise estimates as to what share of that figure would be fixed by real-time payments. A conservative guess of 20 percent would result in about $7 billion in savings a year to lower-income families directly from real-time payments.”
Elena Whisler, head of enterprise global product management at FIS, takes a consumerist view on what is driving the trend toward RTP. It’s simply how people in 2019 live their daily lives, she says. And in that way, some of the benefits are intrinsic.
Most people communicate and receive information immediately via social media and text messages. “You pretty much get any data at any point you want, in your personal life. As that moves forward, it moves into business and how people work,” she says. “They want real-time information and to do things in real time—whether that’s clarifying an invoice or managing cash at a certain time.”
While many examples of RTP advantages focus on P2P solutions, Whisler says from a business-to-business (B2B) perspective, a simple example of a benefit is improving payment reconciliation. “The process is extremely onerous, takes a lot of time,” which delays closing of invoices on the books and keeps revenue from being recognized or invoices from being paid, she explains.
“If we can focus on that, in real time with information, and confirm it in real time, the person on the receiving end can reconcile it faster and earlier,” she says. With strengthened processing, a business can get money faster, significantly increasing cash flow.
Solid benefits can be derived for businesses when there is an “emotional demand for payment,” too, according to Erika Baumann, a senior research analyst for the Aite Group’s wholesale banking and payments practice. “Think of insurance. A catastrophe happens. Your house burned down. Or something has happened, and you need access to money immediately and don’t want to worry about a bank. This could really be a differentiator and impact the loyalty of a consumer.”
Merchants looking to lower costs associated with interchange fees can integrate RTP for card-present transactions that otherwise would have been processed as a debit card payment. They are already circumventing fees via other solutions, says Tedder. “You’re seeing companies like Starbucks doing stored value so they can reduce their cost. At the end of last year, they had $1.6 billion in their bank of stored value—people waiting to buy coffee. They don’t have that $6 cup of coffee interchange, they also have money in the bank, so they can make some interest on it, and they reduce their costs.”
During the TRANSACT session, Faxel pondered a more esoteric gain: establishing a technical framework that people can iterate. “If we can build a system, say, like a Google Maps did, which enabled Uber and a lot of different things … faster payments could set the standards up for and allow for further innovation [for decades] to come.”
A National System
While sources say that RTP is rapidly gaining momentum, the exact trajectory for mass adoption blurred in August when the Fed ended months of speculation and announced that it will introduce and operate FedNow, a “round-the-clock real-time payment and settlement service” that will be available in 2023 or 2024. The service will function “alongside” private-sector services, namely TCH’s RTP network.
According to the announcement, the Fed decided to intervene in the market after receiving more than 350 public comments, of which 90 percent were in favor of the Fed developing a new service for RTP. The regulator is now requesting comment on how to design FedNow “to most effectively support the full set of payment system stakeholders and the functioning of the broader U.S. payment system.” It also is considering the expansion of its Fedwire Funds Service and National Settlement Service hours to “facilitate liquidity management in private-sector real-time gross settlement services for faster payments” and beyond.
Proponents of the Fed’s foray into RTP cite a number of advantages, including increased market competition and improved access for users, and more. During the TRANSACT session, which took place prior to the Fed announcement but after the comment period, Faxel also hinted at eventual global integration. “One of the recommendations from the task force was to look at cross-border, but that was not something that is an urgent need,” he explained. “They identified we [would need] to go ahead and set things up domestically first and then turn our attention” overseas.
Using a public system also may help ease bank rivalries. “There [are] over 10,000 financial institutions in the United States, and I’m hearing continuously of people [who] aren’t sure if they want to use a competing bank’s platform,” says Tedder. “Even though it’s completely separate, there’s still the appearance that they don’t want to give their money to their competitors.”
For its part, TCH, which is owned by 24 financial institutions, will continue to focus on growing its RTP network to reach all depository institutions and offering the same “equitable flat pricing model” to all participants, according to a statement released in response to the Fed announcement. In late August, it announced a partnership with Bankers’ Bank and CGI to develop a Funding Agent platform and liquidity service that will bring TCH’s RTP network to smaller community banks. The network currently reaches more than 50 percent of U.S. accounts for real-time payment receipt.
Moving the Needle
Banks and corporate clients are crucial drivers for RTP ubiquity, according to Baumann. “Many [banks] have gone live on receipts only—they can receive transactions,” she says. “But clients can’t initiate a transaction. There is a little bit of lopsidedness in the market. … We need corporates demanding and more banks adopting with send and receive.”
To accomplish that, ongoing education of all stakeholders is needed. In Australia, for example, Whisler explains that an early RTP discussion among stakeholders and experts began in 2012 and continued over the course of five years, ultimately leading to the nation’s entire system being modernized in 2017.
“Having education about real-time payments with different constituencies and stakeholders allows for broader thought and innovation,” she says. “People get frustrated about talking about the same thing, but we need to remember where we are and what we need to accomplish in the U.S. We have tens of thousands of small businesses, and unlike large corporations or financial institutions, they can’t know every detail.”
Getting to mass adoption also means taking a careful approach. Among the Javelin report’s many recommendations for stakeholders to ramp up RTP, is for the market to evolve from what it describes as a task collaboration.
“[Today] we see a problem, and we go to fix it. We’re not looking at the total ecosystem to say what … the perfect state [would] be, [and] how … we [would] get to ubiquity,” says Tedder. “Right now, we’re trying to solve, ‘How do I get money from me to you?’” Business model integration—where solutions are operational across different applications, real time or not—would be the next step. For example, a consumer could send money using Zelle to a friend using Venmo without changing applications or opening a new account.
Eventually, this will lead to complete ecosystem integration and finally a place where RTP solutions have replaced checks, domestic ACH, and even card network clearing and settlement. Of course, all of these changes are predicated on payments players being willing and able to collaborate.
“What I think could stall [RTP progress] is that we have a tendency to get complacent in the U.S. … There’s this level of wanting to go it alone, to say, ‘I’m different,’ or there’s the lack of trust between organizations,” Tedder explains. “It’s really going to take a spirit of partnership to do this.” TT
Josephine Rossi is editor of Transaction Trends. Reach her at [email protected]. Andrea Billups contributed to this article.
This article originally appeared in the Fall 2019 edition of Transaction Trends magazine. Click here to read the full issue.