It may seem that the U.S. is well on its way to achieving the Federal Reserve’s target for real-time payments (RTP) to be available to every U.S. consumer and business by 2020. After all, since the first wave of early adopters went live with The Clearing House (TCH)’s RTP® network in November 2017, many other large banks have signed on, with hundreds of smaller institutions slated to follow.
So, what’s the problem? In a word, volume. With many institutions still in receive-only mode, or in limited-release pilot, the number of transactions flowing through the system remains relatively low. Even if, as projected, half of all US accounts are RTP-reachable by the end of 2018, that reachability will only be meaningful if payers and payees are actively migrating to new RTP-based payment services.
There are several reasons why this migration is developing slowly. First is the lack of a regulatory mandate, meaning that market forces and market participants must provide the necessary acceleration. Second is that the financial institutions that need to deliver RTP services are taking their time to validate business cases. Lastly, there is the sheer novelty of the proposition; after all, this is the first new payment rail in the United States since the introduction of Automated Clearing House (ACH) in the 1970s. There is little institutional memory—not just in banks, but across the whole industry—of how to roll out a new payment rail and increase adoption.
The payments industry also looks very different today than it did forty years ago. RTP in the U.S. competes for mindshare in a complex ecosystem with a host of new players and initiatives: Same Day ACH, Zelle and a variety of other services from challenger banks, non-bank financial institutions, fintechs, and “puretechs” like Apple or Amazon.
For RTP to succeed, it is not enough for financial institutions to just connect to the network. New RTP-based payment services need to be brought to market, and the industry needs a broad-based education program aimed at consumers, corporates, banks and credit unions, that outlines RTP’s myriad opportunities and benefits. Financial institutions cannot go it alone – collaboration with Fintech partners is essential to drive this education.
Fintechs, the newest ecosystem entrants, are best positioned to play a lead role in this education process. More than ever before, consumers and corporates are turning directly to fintechs for payment services, and financial institutions, in turn, are increasingly reliant on fintechs to provide essential real-time connectivity and processing systems for new payment rails. Fintechs are increasingly the brands that consumers—and by extension corporates—know and trust. It helps that fintechs are masters of agile marketing—many having learned to sell their offerings not only to investors, but also to customers in a crowded marketplace. They are evangelists by nature. The latest and greatest technologies are based on new ideas and new ways of doing things, and in these cases, the technologists have had to beat the drum, blaze the trail and establish critical mass of support for innovation.
To effectively drive RTP adoption in the U.S., education must address two key barriers: the widespread lack of understanding of what “real-time payments” really is and how it represents a change to the status quo, and a lack of awareness on the benefits of RTP.
What IS Real-time Payments?
Most consumers and small businesses likely believe that they already make real-time payments. After all, they regularly purchase goods and services with their credit and debit cards in-store or online. And they are shifting to digital wallets and mobile P2P payment services, which may seem like real-time transfers.
However, these aren’t real-time payments. Credit card transactions are structured loan products, settled by payers at the end of the month. Debit payments are linked directly to the payer’s bank account, but aren’t settled in real-time. In fact, even services like PayPal, Venmo and SquareCash are not real-time payments because the only immediate transfer is between funds held in those wallets. Try to move the cash to your bank or to a different P2P wallet and you’re back to multi-day ACH.
A true real-time payment is one in which money moves almost instantaneously from one bank account to another,24/7. Once financial institutions, consumers and corporations understand what RTP really is, raising awareness on the benefits will follow naturally.
What are the benefits of Real-time Payments?
For consumers, the benefits are obvious: speed, availability, and certainty. While the benefits for businesses may be less clear, commercial payments have the greatest potential to drive RTP adoption. TCH projects that over half of RTP volume will be driven by business-to-business (B2B) payments. This is based on several benefits that only RTP can deliver:
- Monetization opportunities for banks: B2B services are the only way to directly monetize RTP. Data from other jurisdictions where RTP schemes have been put into place – the UK, Singapore, Sweden among others – clearly show that consumers expect RTP to be free, while businesses will pay.
- Differentiation opportunities for corporates: Although corporations generally like to hold on to their money and pay as late as possible, there are cases where offering immediate payment can serve as a competitive differentiator. An insurance company, for example, can empower its adjusters to offer on-the-spot claims reimbursements using RTP, so that customers can get repairs done over the weekend rather than wait for a check or ACH credit.
- Better control over liquidity and working capital: Treasurers today manage cash and liquidity primarily on an end-of-day working-day basis, using bank statements and funds transfer services to ensure that account balances at the end of day will support the next day’s transaction needs. But the businesses treasurers support no longer work on this antiquated basis—goods are bought, sold and shipped in real-time, 24×7, globally. RTP will allow treasurers to operate on an intraday basis unshackled by the business day, keeping up with the speed of commerce.
- Taking the friction out of receivables: U.S. RTP’s request for payment mechanism, combined with its ability to transmit extended supply chain data with the payment, offers a unique opportunity to take the friction out of receivables processing, particularly for small businesses. Consider a restaurant that needs an emergency delivery of supplies for a special event. Their supplier’s delivery person is on the road already, and needs payment on delivery. The supplier doesn’t like cards because of the fees, and they’ve stopped taking cash because of fraud/loss issues. With RTP, the delivery person can send a request for payment—in essence, a digital invoice—with the actual details of the goods to be delivered to the restaurant. The restaurant can approve the request for payment and send a matching real-time payment which is immediately received by the supplier, who can reroute their delivery immediately. Both money and goods move in real time, with no reconciliation needed.
Of course, education, driven by fintechs, is just one element that will drive the adoption of RTP in the United States. New products and services, purpose-built for the RTP rail, are also needed, and the importance of collaboration must be emphasized: collaboration between banks, fintechs, and third parties, to create a result greater than the sum of any of its parts. But banks should not despair about a seemingly slow uptake. After all, change takes time—it took the UK 8 years to achieve the milestone of one billion payments per year on their Faster Payments network.
The call to action is clear: fintechs must go beyond providing connectivity and processing and take the lead in educating and working with banks every step of the way. Banks should embrace collaborating with fintechs to harness the 95 percent of innovation that happens outside their institutions. Consumers will continue to demand more real-time services and it’s up to the industry to act. With RTP, they can finally deliver.