The Reality of Real-Time Payments
Achieving faster payments has been an industry discussion topic for the last several years, particularly as the Fed has brought it to the forefront of everyone’s mind in recent years. Many consumers, businesses and FIs have wondered, “what’s holding the industry back from adopting faster payments?” In comparison, over 40 countries throughout the world have had the advantage of implementing real-time payments.
One of the major challenges the American market must address is the sheer number of FIs per capita, especially compared to the rest of the world. Many countries across the globe only have a small handful of financial institutions serving their populations, while the United States has thousands of active FIs. Furthermore, the market has relied on the private sector to drive innovation, rather than mandating change through regulatory demand. While the industry, in general, agrees that faster payments have a number of cash-flow benefits, FIs, technology providers and anyone else involved in the conversation have shown significant differences of opinion on how to achieve this goal.
The industry is facing a shift in consumer demands, especially as services like Uber and Amazon have transformed the way consumers interact with major brands. Amazon always lets you know where your package is and Uber takes payment for you as soon as you leave the car, both with little to no friction. These companies are just a few examples of how consumers have been conditioned to expect instant gratification and streamlined user experiences and now, they look to FIs to deliver faster, more convenient services, particularly around delivering and receiving payments. Consumers want to know where their money is going and they don’t want to worry about how it gets there, so long as it makes it on time, with assurance and safely and securely.
While the idea of faster payments may sound like it only benefits consumers, it has advantages for businesses, too. Real-time payments can help businesses with their cash flow, as they are able to send and receive funds almost instantly. The idea of making “just in time” payments is important to both businesses and consumers, as everyone wants to be able to be sure that their bills and invoices are paid on time or that they receive funds before close of business.
In the recent past, the Federal Reserve and the Clearing House have proposed independent solutions to the real-time payments question. In 2017, the Clearing House introduced the Real-Time Payments (RTP) network, based roughly on the faster payments success of other countries, however, there are potential hurdles to the adoption of this faster payment rail.
The foremost is that of managing liquidity. With funds moving in and out within seconds, FIs, businesses and consumers alike must learn to adjust to this new rate of cash flow. When large amounts of money might be going out in the course of one day, there might also be large sums coming in. This might not be a challenge for larger asset size institutions, but the smaller ones might have to work to adjust to this rapid exchange. The current real-time payments rail also requires FIs to manage multiple accounts with the Fed, which can also be a hurdle that institutions have to overcome.
The Federal Reserve’s FedNow℠ service has the potential to help smaller institutions compete with the big banks, by leveraging their current relationship with the Fed. The Fed has acknowledged that interoperability is a desired outcome and that it intends to explore this and other paths to reach a nationwide audience. However, it remains unclear as to how this will be achieved. One way could be that real-time payments operate similarly to the current exchange of payment information between FedACH and The Clearing House’s ACH system.
This anticipated interoperability between the two networks will significantly help FIs, by avoiding the need to commit to one network over the other. For now, FIs must choose between the current RTP service that The Clearing House offers, and the anticipated FedNow℠ which will not exist for a few more years. The Fed has asked the industry to provide further comment on its proposed solution, and that comment period closes in November.
With the uncertainty surrounding how and when FedNow℠ will launch, FIs should think strategically about how they approach faster payments. Should they wait around for the Fed or go ahead and jump into faster payments now? The simple answer is: FIs should work to get ahead before they fall behind. If FIs wait around too long, they risk being left behind and losing valuable relationships
With so many consumers simply using their financial institution accounts as “feeder” accounts for the Venmo’s and Paypal’s of the world, FIs must look for ways to bring their business back, away from these nontraditional banking players. When FIs can offer the same fast and user-friendly services, they will be able to turn those “feeder” accounts into meaningful and profitable relationships.
As the industry moves closer to real time payments for all transactions, FIs need to strongly consider adopting payments technology that shoulders the burden of integrating and reduced complexity with these various networks. The right technology will enable FIs to work towards making payments smarter, faster, better and easier for consumers, businesses and individual FIs. Particularly community FIs looking to compete with larger banks should look to invest in technology that is agnostic to individual payments rails and works seamlessly with all of the options, current and future.
Orlando Santos, VP of Product Strategy and Innovation, Payrailz