Real-time payments (RTP) continue to bring exciting developments in the United States. In September of 2017, the Zelle Network was released and in November of the same year, The Clearing House (TCH) launched their real-time (RTP) network and exchanged the first RTP payment between BNY Mellon and U.S. Bank.
Such a network is the first major payments infrastructure to be built in the U.S. in more than 40 years and projects near ubiquity by 2020. Recently, payment processor PayFi has announced that it is bringing the RTP network to Avidia Bank through its Branch99 Real-Time Platform. Drawing from his own experience working on the steering committee for the Faster Payments Task Force, and eventually founding his own bank, Peter Gordon, now Chief Revenue Officer at PayFi, noticed that smaller banks seem to have a knowledge gap in understanding what is needed to participate in the RTP network. Additionally, these banks seem to miss that payments are a low-cost way of increasing deposits and increasing fees.
To address these concerns, we spoke with Peter Gordon and Sarah Grotta, Director of Debit and Alternative Products Advisory Service at Mercator Advisory Group to discuss Gordon’s five-step process for real-time payment adoption.
Step 1: The Business Case
Any new product must start with an analysis of ROI. This tends to be a “black box” for commercial lenders, but FI’s must outline the associated costs and the revenue realized by looking at their commercial market and analyzing potential gains from using real-time payments in comparison to traditional rails. In doing this analysis, FI’s must understand the value added of the RTP network in that it allows for the transfer of both messages and money, which other rails are unable to do. They then must locate an RTP payment processor, and hire the necessary staff such as an underwriter for onboarding, an AML analyst for network support, and salespersons.
Step 2: Risk Assessment
Assessing risk should be a familiar exercise. Banks must follow the normal process for vendor due diligence and risk assessment that is outlined in the FFIEC guidelines. Banks should then evaluate the vendor market, identify risks and analyze the impact on onboarding, deposits, and revenue. Although The Clearing House seems to be on sturdy ground, one must always prepare for if a new technology does not fully develop as intended.
Step 3: Technology Enablement
Banks must decide which rails will connect to their core platform whether that be a card network like Zelle or The Clearing House RTP network. PayFI has developed the core agnostic Branch99 platform with a real-time ledger that is 24/7/365.
As Peter tells us, “PayFi will keep that ledger up and keep the balances updated real-time and then as frequently as the core can be updated PayFi will then update the core based on its typical schedule so you can run the books and you can do settlement overnight.”
Technologically savvy banks can then offer an API to their clients to connect into the network expanding their channels. Gordon explains the use case from the perspective of a merchant processor:
“…the merchant processor uses the API and then instead of providing that merchant’s settlement file the next day or in two days, they actually provide real-time payments throughout the day. So the restaurant can have liquidity throughout the day, pay employees, pay things and improve cash flow.”
Step 4: Market Readiness
We now have a business case and have analyzed the risks and identified the benefits of technology enablement, but we must think of the operational perspective. Market readiness is all about planning for the future and mitigating risk and with a technology that is electronically operating at all hours, one must be ready for when problems occur. When things break at night, remember, RTP is 24/7/365, who is going to provide support? From a direct use-case perspective, banks need to pre-fund transactions over a long holiday weekend. For example, insurance companies paying claim on a Monday holiday needs to be funded from an operations perspective prior to the holiday weekend when the Fed is open.
Being market ready is also about education. New product onboarding requires educating staff, operations, sales, and other channels used to distribute products to customers which must be accounted for accordingly.
Step 5: Market Execution
Now that corporate has planned for the new product, they can use that plan as a playbook for the execution step. Banks can now begin to ask important questions that can be tested against the real world. Are we seeing the volume expected? Are we onboarding the right customers? How is RTP impacting the bottom line? What is the risk for merchant-funded rewards with RTP technology? Stick to the playbook.
Similar to step 4, education must be continued among staff and the customer, especially since many consumers may not be familiar with the added benefits of real-time payments technology.
RTP is “conversational commerce”
Real-time payments bring an important benefit to FI’s with its data-rich messaging capabilities, which are often undervalued in assessment. Furthermore, the reconciliation process is much improved with what Peter calls a “conversational commerce” as this messaging keeps track of payment history and its context of use.
Transactions now contain information of whom it is being sent to as well as an acceptance or rejection of payment. In the insurance use-case, approvals can now go along with the payment messaging rather than be separate because they are push-transactions, which speeds up the process of attaining cosigners.
Peter tells us of a paid-on-delivery use case with a wine distributor. If a restaurant wants 90 cases of wine, but they are delivered 100 cases by the distributor, the restaurant can respond to the request for payment and ask for 90, which would be logged as a message in the payment network. As Peter tells us, the richness of the data network is about “not just moving money but moving messages in a conversational way.”
The time is now for RTP
The Federal Reserve has put forth a challenge to the industry to have faster payments by 2020, but this is “aspirational” more than set in stone. With no regulatory mandate, companies will continue to develop technologies at their own pace. Large FI’s have already begun working on RTP integration, so for smaller FI’s, Gordon tells us the time is now to get going with RTP.