With the introduction of the RTP® network by The Clearing House in 2017 and the upcoming launch of the FedNow℠ instant payments service, real-time and faster payments are becoming more common in everyday money movement.
A recent report sponsored by Volante Technologies, titled “U.S. Real-Time Payments: A Catalyst for Payments Modernization,” explores the current state of real-time payments and the multiple use cases being met, such as accounts payable, bill payments, and transfers of high-value funds.
This article will highlight the main takeaways from the report, including the options available to banks when selecting which instant payments networks to leverage and why instant payments products for bill pay are likely to be more profitable than those involving peer-to-peer (P2P) transactions.
The State of Instant Payments
Real-time payment systems are transforming the way businesses and consumers transfer money, and the United States is at the forefront of this payments revolution.
The Clearing House (TCH) developed and operates RTP, the first entirely new U.S. core payments infrastructure developed in over 40 years. RTP uses the ISO 20022 messaging standard, which enables extended data exchange and accommodates business use cases. More than 300 institutions, including community banks and credit unions, are connected to the RTP network, with direct connections to 62% of U.S. bank accounts.
The Federal Reserve’s instant payment system, FedNow, is set to launch in July 2023, and its initial transaction limit is $500,000. FedNow will also use the ISO 20022 messaging standard and has a pricing model that offers discounts to encourage early adoption.
The Zelle instant payments network, owned by seven large U.S. banks, has more than 2,400 banks and credit unions contracted on the network. Zelle started as a P2P service but has expanded into other use cases, including paying invoices and gig economy workers.
Real-time cross-border payments are the next expected breakthrough, and EBA Clearing, SWIFT, and TCH have launched a collaboration called Immediate Cross-Border (IXB). The project is expected to launch in the coming months, starting with the United States and Europe and using the RTP system and IXB as the switching mechanism.
From a business perspective, real-time payments improve payment processing efficiency, reduce costs, and provide opportunities to add new business. Real-time payments have many potential benefits for customers, including faster settlement times, improved cash flow management, and an enhanced customer experience.
Instant Payments as Revenue-Booster
Skepticism about whether real-time payments can be effectively monetized is not completely off-target, but it holds true more for consumers than for billers.
In 2022, Javelin Strategy & Research surveyed more than 3,000 U.S. and 1,000 Canadian consumers and concluded that few consumers are willing to pay for faster payments. Only 36% would be willing to pay for bill pay, partly because P2P apps such as Venmo have reinforced the idea that faster payments should be free. And that is important, because the survey found that P2P transactions are the most common use case of faster payments, with 47.2% of Americans having made such transactions in the past year.
Although consumers are not necessarily willing to pay for real-time payments, billers are.
Banks such as BNY Mellon and Citi have worked with companies like Verizon to send request-for-pay (RfP) messages to consumers, who can accept the message and respond by originating a transaction to make the bill payment. Other banks such as Chase Bank and U.S. Bank have also rolled out RfP to their corporate clients, allowing them to request payment from their customers.
The implementation of RfP by these four banks may prompt other banks to identify more business use cases, which can be monetized. Some of the use cases associated with B2B include invoiced payables, payroll, corporate loan funding, and real estate closings. Furthermore, B2B data can also be processed with artificial intelligence to improve fraud management systems and promote better customer behavior (all the better to market new products).
A recent Javelin survey shows that 56% of U.S. companies are expected to use real-time payments by next year, so the market for these products is clear.
What Banks Should Do Now
Financial institutions need to modernize their payments infrastructure to remain competitive with traditional providers and new entrants in corporate banking. Modernization in the United States should include a migration from existing messaging formats to ISO 20022, the growing global standard. Both FedWire and CHIPS are migrating to ISO 20022—FedWire in 2025 and CHIPS in 2024—so banks must prepare for this shift, as it’s inevitable. Banks should also devote resources to helping their clients understand these changes and how to navigate the migration efforts.
Institutions have a choice between two real-time payments networks—the RTP network and the FedNow service—and must decide whether to use one or both. Because the two networks are currently not interoperable, a payment initiated on the FedNow service cannot be completed if the recipient’s bank supports only RTP, and vice versa. It is recommended that institutions, at the very least, have the ability to receive payments from both networks.
With the squeeze on income from deposits, banks are naturally looking for other sources of income. The payments-as-a-service (PaaS) model involving real-time payments can be a big part of that. Institutions should analyze the use cases that are most important to their clients and determine what capabilities are needed to support them.
In addition, speed, visibility, and ease of navigation are key factors preferred by Millennials and members of Gen Z. Adopting real-time payments is an opportunity to shift operations to focus on the preferences of the younger generations (who soon will be dominant in the economy) while also developing products that will monetize instant payments in various use cases.