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With the upcoming launch of the FedNow Service, real-time payments continue to be a topic of discussion as demand grows among customers and businesses. More financial institutions are seeing the importance of enabling a range of real-time use cases to remain competitive and enhance the customer experience.
Where Real-Time Payments Stand in Availability
Less than 10 years ago, real-time payments capabilities were limited to specialized and sometimes costly options, such as wire transfers. Since the launch of Zelle in 2017 and The Clearing House RTP® network a few years ago, real-time payments have become increasingly accessible.
“Fiserv has about 1,200 financial institutions that have launched some form of real-time payments,” said Tim Ruhe, Vice President of Real-Time Payments at Fiserv. “And a lot of that is Zelle person-to-person payments. And now most of those financial institutions are looking at how they expand their real-time payments capability for consumers and businesses and how they connect to The Clearing House and/or the FedNow Service so they can launch a whole new generation of real-time payment capabilities.”
Use cases grow when financial institutions partner with technology solution providers.
“Here in the U.S., five years ago we launched the RTP network in order to provide true real-time payments all the way from the front-end customer experience to the back-end clearing and settlement,” said Keith Gray, Vice President of Strategic Partnerships at The Clearing House. “We have 300 banks and credit unions that are offering some form of real-time payments via RTP to their customers, receiving and sending as well in many cases.
“That covers about 65% of the U.S. account base. If you’re a company using the network, you can reach about 65% of your customer base with a real-time payment right now. And that number continues to grow every week as we add new financial institutions through technology partners like Fiserv and many others. The types of use cases continue to grow and evolve. Things like same-day payroll, where you work your shift and get paid today, are a growing trend.”
Gray also mentioned that Square and Elavon use the network to allow their merchants to instantly transfer money from merchant accounts into their bank accounts.
As the use cases grow, the launch of the FedNow Service will help drive real-time payments toward ubiquity.
“We still have a little bit of work to do to get to ubiquity, which would be when every individual or financial institution in the country has access to these new payment capabilities,” said Dan Gonzalez, Vice President of Customer Relations at The Federal Reserve. “But as we get ready to launch the FedNow Service this year, we’re excited about the possibilities it’s going to bring in connecting with every financial institution. So, while there are 300 [FIs] connected to RTP today, there’s still 9,000-plus financial institutions that we need to work to get connected to an instant payment system.”
Gonzalez likened the rollout of the FedNow Service to passengers eagerly awaiting to board a plane.
“We’re in the process of queuing everybody up and boarding participants onto the airplane,” he said. “We’ve got a number of service providers, and a number of financial institutions that are currently in the testing process. They’re exchanging messages through our network in a test format to get ready to go. We’re going to continue that for the next few months to get folks ready.
“Once we have that airplane boarded, we’ll close that door for those first organizations, take them out onto the runway, get them taxied up and then ultimately launch that airplane later this summer. We’re excited about what’s coming and ultimately creating that path for a seamless experience to get more financial institutions connected to the network.”
Gaming apps use real-time payments to enable money movement into and out of the apps. Although many real-time use cases are at the consumer level, soon the business-to-business (B2B) ecosystem will be benefitting from this capability.
“The awareness factor has really leapfrogged over the past several years,” said Steve Murphy, Director of Commercial Payments at Javelin Strategy & Research.
“If you went back to 2018 and I said to my kids, ‘I’m going to Zelle you some money for Christmas,’ they would have said, ‘What’s a Zelle?’
“And now that’s really at the tip of the tongue. Everybody knows that brand name. I think that’s moving rapidly into the B2B space as well.”
The Beneficiaries of Instant Payments
Instant payments are about more than just moving money quickly, and it’s not just financial institutions that stand to benefit. Consumers are top of mind when it comes to real-time payment use cases. It’s about getting the money they need, right away.
“The initial benefits we’re seeing are for consumers because consumers don’t have the big lines of credit that businesses do,” said Ruhe of Fiserv. “So cash flow is super important, especially for getting paid. That’s why you see a lot of real-time use cases not just for person-to-person payments but claim payouts and gig economy payments because getting paid is really important.”
“Consumers will benefit by having better visibility into their account balances and a greater understanding of when funds are available and usable to them,” said The Federal Reserve’s Gonzalez.
The next strategy for increasing use cases will be serving small businesses. “As we talk to financial institutions, they’re developing roadmaps for capabilities for all their customers, for consumers, and businesses and small businesses, said Ruhe.
“But I predict one of the next big focus areas will be on small businesses. Small businesses also have to have a careful eye on cash flow. Real-time payments definitely help with cash flow. We’re seeing a big push to help small businesses with that cash flow by enabling more real-time payments capabilities for them.”
“Businesses will benefit by having better control over their funds, understanding or having the ability to pay invoices in real time, taking advantage of payment discounts, and having various opportunities to manage those funds in real time with greater visibility,” added Gonzalez.
In a digital world, The Clearing House’s Gray noted, payments need to be faster, cheaper, and easier.
“Another thing we hear from the banks on the network is that there’s a huge value in being able to get paid faster or pay faster,” Gray said. “The immediacy is a big deal. We call it RTP for a reason. If I owe a million bucks, I can wait until midnight tonight, I can hold it in my account to 11:59, and then I can send it. And especially in a rising-interest-rate type of an economy, that’s a thing that becomes a huge deal as well.”
Said Ruhe, “It’s not just about real time. The money gets there instantly. There are two other important features. One is it’s guaranteed, it’s confirmed. If you hit send and you get the confirmation, you know it’s there.
“But just as important is it’s 24×7 now. That’s not in the name. We don’t call it 24×7 payments. We call it real-time payments. We as consumers operate 24×7. If I have to wait till Monday for the payment to get there because I’m trying to send money on a Friday evening, that’s a problem.
“Our digital world operates 24×7, and the legacy payment systems do not. These new real-time payment rails do. These payments work evenings and weekends, which is important.”
Leveraging Multiple Real-Time Networks
To determine whether leveraging multiple real-time payment networks is possible, we must unpack the current capabilities of each platform and its role.
“There are going to be two live real-time payment networks,” Gray said. “Both networks speak the same language, both are built on the same platform, ISO 20022.
“I believe there will be some level of ubiquity across both networks. The networks will be able to talk to each other in some form. That’s the intent, anyway. The Fed is going live with the FedNow Service this year, and I’m sure we at The Clearing House will pick up those discussions down the road. I don’t think it’ll ever work exactly like ACH does because of the nature of the networks.
“ACH works in a batch process. We send files back and forth to the Fed. It’s a very straightforward process. And a bank just connects to one ACH network.”
“With real-time payments, each transaction is processed individually within seconds. There is no concept of a batch. To get full ubiquity across the industry, you’re going to need to be connected to both networks, and you will need some type of routing capability like the Fiserv payment hub solution, as an example.”
On that road to coveted ubiquity, financial institutions must first analyze their own goals.
“Having ubiquity is going to be key, but there will be different ways for that to be facilitated,” The Federal Reserve’s Gonzalez said. “If one endpoint is on one network, that transaction would go to that rail. If it was on another, it would go to a different rail. I think it’s really going to be up to the financial institutions to look at their needs and see how those can be fulfilled by either network. A lot of that will be driven by the complexity of the organization, what their objectives are with real-time payments.”
“There’s going to be a certain amount of overlap, but there won’t be 100% replication,” Mercator’s Murphy said. “Depending upon who the banks are trying to get to on the endpoints, they have to consider both networks.”
The FI View on Sending Real-Time Payments
Although a growing number of FIs can receive real-time payments, sending them requires additional capabilities.
“Many FIs have started with enabling receipt of payments,” said Ruhe of Fiserv. “That doesn’t require any change to their user experience. They can just start getting payments and letting customers get paid faster.
“Once they move to originating real-time payments, they must present some new capabilities to the user. They must change something they already do. If they have a digital payouts capability, they’re going to make changes to the service that they offer the customer for digital payouts.
“If they are offering real-time transfers, they have to update the real-time transfers application, and that’s what their road maps really are taking into account. ‘How do I enable more of these send capabilities, a real-time bill payment capability, a real-time payables capability’?
“Part of this is just working through the project backlog of making the changes to those applications to enable real-time. Because a real-time payment is not just a new standalone thing. A real-time payment is a new feature of a service you probably already offer.”
The ability to both send and receive a real-time payment will quickly become a baseline expectation of a financial institution, Gonzalez noted, although send capabilities will be more challenging to acquire.
“As these networks continue to grow and develop, and as we launch the FedNow Service later this year, the receiving capability is really going to be table stakes,” he said.
“It is more challenging to implement the sending capabilities because of the interfaces and updates that need to be made. However, a lot of the technology providers and service providers are starting to ramp up their capabilities to send and make it easier for financial institutions to implement the send capability.
“As we evolve and continue to grow the network, the process will become more streamlined and easier for those downstream financial institutions to be able to send for their customers.”
Murphy offered a history lesson on how real-time capabilities have evolved.
“Mercator did some research back in middle to late 2018 after The Clearing House RTP Network launched,” said Murphy. “We talked to eight of the larger financial institutions that were doing direct connects.
“We asked about the challenges and how they were implementing. Most were doing receive first. A couple of them are doing receive and send simultaneously. When we asked them about the challenges from a technology standpoint, they were rating it about 5 to 6 out of 10. The larger concern was internal communications, the operational procedures that had to be in place to support sending. This is something that most of the institutions now will be looking at.”
“A receive is a very easy pass for most FIs because technology providers like Fiserv can turn that on for you very easily,” The Clearing House’s Gray said. “Phase One has always been that we want to enable our customers to get paid faster. It’s a service they want, it’s a service they expect, and it creates a new deposit channel into the bank.
“Now, it’s technology providers that most banks leverage. The vast majority of banks rely on a technology provider for their real-time payment-based connectivity and services. Each of those technology providers offered receive first.
“Now they’ve all moved into or are moving into different send-based applications. Send is different than receive in that there are many use cases that are spend-based use cases where receive is one capability. You can’t just flip a switch and ‘turn on send’ because it could be a small business app, it could be a Treasury app, it could be a consumer app.
“We see new use cases coming on board every day and most are being driven by a technology provider working with their banking relationship. It’s a technology provider that is providing a bank a service or an application they can turn on.”
A Look Into The Future Of Real-Time Payments
With many U.S. banks working toward providing real-time payments for customers and businesses, the innovation does not end here. New capabilities and solutions are in the works.
Gonzalez of The Federal Reserve sees strong potential for merchant-focused offerings.
“One large technology provider just made an announcement that its created a new platform to enable pay-by-bank for merchants,” Gonzalez said. “I do think the use of an instant payment or real-time payment network to facilitate point-of-sale and other merchant transactions will come around. There’s been a lot of discussion in the industry about that capability as an alternative to some of the traditional payment methods. Pay-by-bank is one that I think is interesting and certainly worth the industry keeping an eye on.”
Ruhe of Fiserv agrees and anticipates a focus on small businesses as well, adding, “A lot of the focus has been on consumers so far. At some point, the ability to use this in a merchant payment scenario will be coming. I think cross-border will be coming. Small businesses have these same cash flow issues. They operate 24×7, and they’ve been largely underserved. Giving them the ability to pay and get paid instantly more often is going to be a big focus area of our industry in the next year.”
Murphy of Mercator sees a strong use case in cross-border payments, “One of the things I’m hearing about is the potential for use for real time cross-border. There’s a lot of activity going on with the RTP Network, EBA clearing, and SWIFT. You might start seeing some of that during the latter portion of this year.”
The Clearing House’s Gray outlines the broad benefits of real-time payments data, “Another thing we’re seeing is applications being developed that leverage the data capabilities of a real RTP Network payment, the ability to send information across the network as well as the actual payment. A corporate biller can send a request for payment that includes not only the request but the data associated with it (the invoice and the bill and where I want you to pay me). And that gets delivered to a small business or a consumer who can then make the decision to pay it now or pay it later.”
What Fiserv Is Doing to Get FIs and Their Customers Connected to These Networks
FIs do not have to worry about the complexities of processing real-time payments. With Fiserv solutions, they can easily get connected to real-time networks.
“We’re creating solutions that are very much turnkey solutions,” Ruhe said. “Solutions that you can consume as a service or as an infrastructure. It makes it easy to implement and turn on so that you can start processing real-time transactions. That’s certainly true for stage one of getting connected to these networks.
“The next thing is we’re baking real-time capabilities into every other kind of processing service we have. You may have a business that wants to do digital disbursements, and we have a digital disbursement service that we sell through financial institutions and to large businesses. So we’re enabling real-time as a feature out of the gate so our clients don’t have to do a lot of heavy lifting. It’s a feature they can just turn on.
“We’re baking support for real-time into solutions across the board, whether they’re consumer solutions, small-business solutions, FI connectivity solutions, or business payment solutions. Bake it in, make it easy, let’s make customers happy.”
In the end, Fiserv is playing a key role in enabling consumers, FIs, and small businesses to fully benefit from all that real-time payments have to offer.