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US real-time payments: Ubiquity is coming

05/02/2018

BNY Mellon originated the first transaction to go out over The Clearing House’s (TCH) new real-time payment (RTP) platform. Michael Bellacosa, Head of Global Payments Product Management, BNY Mellon, discusses the corporate implications, with colleague Carl Slabicki (second picture), Line Manager for Immediate Payments. 

The first new payment and clearing infrastructure in the US for more than 40 years became operational on the evening of 13 November 2017 when an instant payment between BNY Mellon and US Bank was initiated on The Clearing House’s (TCH) new real-time payment (RTP) platform. $3.50 was moved from us to them as a test in three seconds.

The clock is now for other banks to join and for the US TCH RTP platform to reach ubiquity, which is envisaged industry-wide by 2020. The time to act on implementation is now.

Banks and corporates face pressures from different directions, but both will have to move quickly to make critical decisions about how and where to build out their RTP capabilities. Both will face mounting pressures from consumers and competitors in a fast-moving environment. The industry is strongly committed to full adoption by the end of 2020.

For banks, financial technology (FinTech) inspired non-bank competition and seamless peer-to-peer (P2P) payment alternatives have set a high bar for the end-user experience. This in turn influences broader customer expectations for how quickly cash should flow between a payer and a payee. The experience has created a wake-up call for financial institutions (FIs).

In parallel, the unmet needs of banks’ corporate clients and frustrations with current payment capabilities raise the level of demand. Corporates have long sought a solution for issues such as finality and return risks within accounts receivables (A/R), and for high cost, poor transparency issues within payables. However, new RTP systems can aid cash management.

Consumer and corporate demands
Together, consumer and corporate demands for fast, trackable payments have converged with broader pressures, such as regulatory drives through to economic globalization, to spark unprecedented collaboration among banks in the US.

While many experts and analysts in the payments space may view the US as a global laggard in terms of real-time payments, the three-year 2020 path from the first originated payment to ubiquity will be relatively short.  [For comparison the European Payments Council (EPC) originally said it only expected 50% of payment service providers (PSPs) in Europe to be adhering to the SCT Inst scheme by the start of 2020 –Ed.]

The 2020 target in the US is impressive, given the relative lack of consolidation in the American banking sector. There are a multiplicity of smaller US banks, credit unions and so in America, so there are unique challenges and opportunities in the country.

Banking cooperation
From the earliest days of the RTP initiative, banks have worked together in partnership with other banks, with industry groups, and with other payment stakeholders. Now that six large national banks are on the US TCH RTP network already, we see the remainder of the top 20 banks moving quickly to connect directly to this RTP network, and positive momentum in other tiers of the US banking sector as well.

At the same time, the TCH RTP network by design does not force each bank to build its own infrastructure. Smaller and mid-size banks, regional banks, community banks, and credit unions –  segments that make the US banking system so complex – are looking to technical service providers and gateway providers to help. Alternatively, other banks can help them get themselves on the network more quickly without extensive investment in their own infrastructure.

It is a consistent element of discussion among banks that ubiquity gives everyone a built-in incentive to come up to speed as soon as possible. We see this belief in the power of a network effect behind RTP as the main driver to achieving the goal of quick ubiquity by 2020 …let alone the growing realization that corporate clients will come knocking on banks’ doors demanding better services soon enough.

The value proposition: Corporate focus
For corporates, urgency arises from rising awareness that the benefits of RTP go beyond mere speed. The value proposition lies not just in settlement but also in the data-rich information that comes with a payment, especially if using ISO20022 messaging.

Corporates believe that payments and payment info between parties to a transaction should move like data in any other digitally-enabled business system. Beyond speed, RTP provides interactivity between a business and their consumers and business partners. A business sends them a request for payment, which they can pay directly, and provide instant confirmation to both the recipient and sender. It also cuts down on exceptions and the long intervals of emails, faxes, calls, etc. needed for exception handling. In a sense, with RTP, the medium is the message.

But this understanding did not emerge overnight. Early and frequent education during webinars, industry conferences, and one-on-one meetings has helped unlock corporates’ awareness of the potential value in RTP. Most companies that we speak with go through a cycle, the five stages of adoption as I call it.

Five stages of RTP adoption
The initial impression of corporates in the face of a new RTP system is sometimes intimidation.

  1. The first stage in the adoption process for RTP is therefore acceptance. Corporates anticipate stress on resources and costs in a world where most accounts payable (A/P) and accounts receivable (A/R) departments are already stretched thin. Cash management resources are not infinite, so they worry at first about how to adopt RTP until the benefits become clear.

 

  1. Then corporates grasp what RTP enables. They start to understand the potential benefits of greater transparency, of final and irrevocable payments, and the potential to integrate payments directly within other business processes in the enterprise resource planning (ERP) systems so that, for example, a received payment can immediately trigger a release of goods for shipment in a fulfillment system.

 

  1. Third, corporates recognize that banks have designed it not as replacement but as a complement to existing payment capabilities. Banks have made deliberate efforts to allow corporates to use RTP with as little or as much effort as corporates choose to make, so they can get on the network and use existing channels as well, even in an integrated payments ecosystem.

 

  1. Fourth, often with close consultation with their bank as a partner, corporates begin to craft specific use cases where RTP makes sense for their business and gives them a competitive advantage. A telecom provider, for instance, can resolve a billing dispute with a customer, receive payment, and restore service during a service interaction; an insurer can make an emergency claim payment in the case of a natural disaster immediately when their client needs it. Alternatively, an investment manager can make a direct disbursement without cutting a check, and the beneficial examples go on and on.

 

  1. Finally, corporates make choices for short and long-term integration. Corporates can simply put their toe in the water and add RTP as an option, while retaining their existing reporting and originating channels. Alternatively, they can evolve towards full integration with their overall business footprint via application programming interfaces (APIs) and 24/7 integration with their banking partners to fully unlock the value of RTP.

 

With the US TCH RTP platform, every entity involved in the design and planning of it has paid special and careful attention to providing adoption options, for both banks and corporates.

This approach mitigates the adoption complexities that had previously held the US financial system back from offering a real-time capability. Now it’s here. We’re live. Banks and corporates are already using it the new platform and it is growing. Those who have held back from being an early adopter will quickly find their business partners coming online, and risk finding themselves caught short if they don’t begin planning and implementing RTP themselves as soon as possible.

Author: Neil Ainger
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