In today’s world, nearly anything a business or individual desires is available instantly. Yet, for most, receiving a payment still takes two to three days to clear, despite the availability of instant payments networks such as FedNow.
What will it take for instant payments to reach a tipping point and become a standard expectation? In a PaymentsJournal Podcast, Justin Jackson, Head of Enterprise Payment Solutions, Digital Payments at Fiserv, and Jordan Hirschfield, Director of Prepaid at Javelin Strategy & Research, discussed potential triggers for an inflection point for FedNow and other instant payment methods, and how financial institutions should be preparing now.
Looking for Hockey Stick Growth
Although instant payments have experienced steady growth and adoption, a defining moment that pushes them into the mainstream has yet to occur. Instant bank-to-bank transfers and digital disbursements platforms process payments in real time, but a breakthrough use case that drives significant volume has not emerged.
One likely catalyst for that critical moment would be the federal government. As the largest payor to both individuals and businesses, any major move toward instant payments could have a sizable impact on the U.S. economy. The government possesses the ability to shift the market.
Steps in that direction have already been taken. The federal government has largely stopped issuing paper checks—with a handful of exceptions—so recipients of government funds increasingly require bank accounts for direct deposit. It’s a small step from there to instant payments.
Europe has already completed a similar transition, with real-time payment methods integrated into everyday financial activity.
“I was in the EU earlier this week, and I met with a large bank that recently deployed instant low-value payments in their markets, the equivalent of a FedNow or RTP transaction here in the U.S.,” said Jackson. “They didn’t do a bunch of marketing fanfare, and they didn’t automate conversion of their low-value batch transactions into instant transactions. They just put it out there so that users could take advantage of an instant payment. Within a matter of weeks, they’ve already seen usage approaching 20% for the instant transaction instead of the batch-based transaction.”
Disaster Payments
A critical opening for government intervention is providing instant payments for disaster relief. Anyone who has experienced a hurricane or wildfire knows the urgent need for immediate funds to cover basic necessities, such as clothing or temporary lodging.
Receiving a check is often impractical in a disaster zone, as cashing it can be nearly impossible. While prepaid cards are sometimes used, they’re limited—recipients can’t pay rent or make other essential payments that require traditional banking access.
What people truly need is direct deposit into their bank account. If their FI can’t process the transaction instantly, recipients are effectively cut off from accessing and using the funds when they need them most.
“Having that instantly delivered transaction is critical, and being the financial institution that enables that is going to engender loyalty that you were part of the solution in their time of need,” said Hirschfield. “As opposed to, well, you weren’t ready, right? You weren’t at the table and able to take that transaction in real time. That’s a very different perception from your account holder as to the capability level for your institution, taking that instant payment at the moment when it was really important.”
Options for the Gig Economy
In the private sector, one promising use case is within the gig economy. Workers in this space are often paid irregularly. For example, someone who spends an afternoon driving so they can pay their rent may need to receive their earnings quickly. But that is not always possible.
“We’ve seen gig economy companies telling workers that because of where they bank, they can’t get their money for another three days,” said Jackson. “Now put yourself in the mindset of that worker. The whole reason they just spent an afternoon doing this work is they need that money right now because the rent is due. Being told to either wait three days or go to a different bank, it might make sense for them to think about a different financial institution relationship.”
The Challenge for Smaller Banks
Financial institutions and banks serving smaller communities have been the least likely to enter the instant payments fray, yet they may be the ones who need it the most. They can’t afford to have a competitor down the street offer this service while they can’t. As more government payments start to flow across instant payment rails, and as more agencies disburse or accept funds this way, nonparticipating FIs will face even greater pressure to join the networks.
That same dynamic will also spur the discovery and utilization of new use cases. Availability is the first step toward mass adoption, setting the stage for a critical mass of FIs nationwide to participate in the networks. As participation grows, so too will adoption and usage, ultimately making instant payments the norm rather than the exception.
Don’t Get Left Behind
So, what should smaller banks and credit unions be doing now to prepare for instant payments? The first step is to consider the implications for their own business. They should evaluate how their products can leverage instant payments—not just in terms of technology, but in how customers—from consumers and small businesses to commercial enterprises—actually want to use them.
Most importantly, don’t wait for the inflection point before taking action. Banks that hold off until the government mandates instant payments for key transactions risk being left behind.
“Social Security payments are not available as instant transactions right now, but don’t wait for that announcement to come out until you sign up,” said Jackson. “Otherwise you will have a whole list of customers asking, ‘Why can’t I receive my payment instantly?’ Because it’s guaranteed that someone else can.”