The hottest topic in the payments industry is the rise of faster payments. The widespread expectations for speed and seamless experiences from both consumers and businesses, coupled with innovations such as cloud, digital payments technology, and ISO 20022 messaging, are positioning faster payments to reshape the industry.
The most promising type of faster payment is called real-time payments. These are account-to-account transactions that clear and settle within seconds of being initiated. At the moment in the U.S, there is only one rail, operated by The Clearing House (TCH), that supports this type of transaction. The rail, known as Real-Time Payments (RTP), is seeing increased volume growth.
To understand how RTP fits into the faster payments landscape, PaymentsJournal sat down with Vinay Prabhakar, Volante’s vice president of product marketing, and Steve Ledford, The Clearing House’s SVP of Products and Strategy.
Joining us was Steve Murphy, director of Commercial and Enterprise Payments Advisory Service at Mercator Advisory Group.
During the conversation, they discussed the state of faster payments in America, how the FedNow announcement is impacting RTP, the challenges and benefits of joining RTP, and how Volante and TCH are collaborating to make joining RTP easier and more cost-effective.
Faster payments: “It’s about time”
With improved processing speeds and advances in mobile technology, the world is undergoing a digital transformation. At the same time, societies are changing as people expect faster and more dynamic service throughout their lives.
Murphy said that these twin trends are coming together to make the rise of faster payments seem inexorable. It’s about time, he said, that faster payments have taken off.
Not wanting to miss out, many companies are now exploring ways to connect to the world of faster payments. “This is a great time, actually, to be in the payments industry because there are a number of faster payments options available today,” said Prabhakar.
One popular product is NACHA’s Same Day ACH, which allows receivers to see funds clear in as little as a few hours, depending on when the transaction is initiated, said Prabhakar.
Another popular product is Zelle, which has about 250 financial institutions directly transacting across its network. Zelle is primarily used for P2P transactions and often, from the consumer’s perspective, feels as if it’s a real-time rail.
However, Zelle transactions are still settled at the end of the day via regular ACH, explained Prabhakar.
In fact, until the Federal Reserve’s recently announced FedNow goes live in a few years, there is only one truly real-time payment rail in America: The Clearing House’s Real-Time Payments (TCH RTP).
The state of TCH RTP
As the only current real-time rail, TCH RTP is experiencing healthy adoption. Part of its success is because RTP is “not set up for a specific purpose,” said Ledford. Instead, TCH’s job “is to efficiently and effectively move data and payments and money between financial institutions for their customers.”
Since RTP was not set up for one specific use case—only P2P transactions, for example—customers are able to leverage the rail for a variety of purposes. From B2B invoice payments to digital wallets, RTP is facilitating a range of transactions. The unifying factor is that businesses are able to become more efficient and solve unique pain points by using RTP.
Moreover, the number of transactions is rising, as is RTP’s reach. “In terms of overall network, the reach of the network is expanding every week,” said Ledford. He noted that just this week, RTP signed up two more large banks.
Companies such as Volante are enabling this growth, as they are making it easier than ever to plug into TCH RTP.
FedNow’s impact on The Clearing House’s RTP network
When the Federal Reserve announced in August that it would be rolling out its own real-time payments platform as early as 2023, many in the industry speculated on the impact this could have on The Clearing House’s business.
At face value, one might expect that since FedNow will compete with RTP, it would slow down RTP’s growth, but Prabhakar, Ledford, and Murphy all offered a more nuanced and optimistic forecast.
Prabhakar pointed out that the Federal Reserve’s announcement underscored the importance of real-time payments in general. This has had the effect of encouraging banks to accelerate their plans to adopt real-time solutions.
And at the end of the day, Prabhakar reasoned that end users—be it consumers or businesses—don’t actually care about FedNow, RTP, or any product name. All the end user cares about is that the transaction happens safely, reliably, and swiftly.
“So what banks need to do is really focus on what services they’re bringing to market, and then look at making sure that those services are cross network compatible,” he said.
Ledford agreed, noting that after the Fed’s announcement, he’s witnessed an almost immediate uptick in interest from financial institutions. Sure, some will wait for FedNow to go live, but many will instead explore more immediate solutions, he said.
The challenges of adopting RTP
In order to understand the challenges of adopting RTP, Prabhakar said it’s important to differentiate between large banks and smaller banks.
For the former group, they’ve taken a “build it and they will come approach,” said Prabhakar, meaning that the large banks are embracing RTP with the expectation that customers will follow. And since it’s the first time that many of these banks have implemented real-time infrastructure of any type, going live has been a pretty substantial project.
These banks have multiple legacy systems—Wire, ACH, SWIFT—and numerous channels, so the process is complicated because the banks need to ensure “they’re providing RTP services in a channel agnostic way, across all of their customer segments and channels,” explained Prabhakar.
There’s also the issue of pricing. Large banks need to determine appropriate pricing for all the different market segments they serve.
As a provider, Volante has worked to make connecting to RTP easy, but for all the above reasons, challenges remain.
Smaller banks have other challenges, namely customer demand, market readiness, and cost. Unlike the large banks who can just build the infrastructure with the expectation that customers will readily use them, small banks aren’t as sure what their customer uptake or transaction volumes will be.
These banks are also not entirely sure what customers are willing to pay for the service. However, this is starting to change as more banks enter the RTP network and the market becomes more defined.
Murphy pointed out that fraud is another major area of concern. With faster payments comes faster fraud, so companies need to explore the many robust fraud protection offerings available in the market.
With so many moving parts, Ledford stressed the importance of planning.
“You need to make sure you’re doing things like getting your risk management organization and your legal team involved earlier,” said Ledford. And since customers invariably have questions about the new product, “when you go live, you want to make sure that folks in your branches, in your call centers, in your commercial business, they understand what this new capability is.”
How Volante and TCH are helping companies cope with these challenges
Volante has been helping financial institutions hook into RTP from the beginning.
The very first TCH RTP was initiated between BNY Mellon and US Bank, and was made possible by Volante’s VolPay technology
Volante’s chief concern is making RTP available to banks of all sizes. To do so, Volante has made its RTP processing solution available as a service in the cloud, enabling banks to directly connect to RTP directly without needing to invest heavily in new infrastructure.
As a further incentive, Volante is offering the service completely for the first three years. There are no service fees and no transaction fees for typical mid-size bank transaction volumes. In addition, there are no onboarding fees, and customers can be onboarded in 60 days or less.
Prabhakar noted that while Volante can’t solve all the challenges, the company is eliminating provider cost as a barrier to entry, and making it really easy for banks to connect quickly to RTP—allowing them to focus on their customer value propositions rather than lengthy implementation projects.
For its part, TCH is focusing on educating the public about its RTP network. Through podcasts, webinars, and articles, TCH is explaining to the public what real-time payments are, how you can connect, and what the benefits are of doing so.
“Our job is to make sure that folks understand the network and understand how to work with it well,” said Ledford. With the number of banks signing on accelerating, and RTP transaction volume steadily rising, it appears that both Volante and TCH are achieving their objectives.
To learn more about the cloud-based real-time payments service mentioned in the podcast, visit https://www.volantetech.com/freertp. For Mercator’s take on where payments hubs and payments technology are headed, read the white paper “From Payments Hubs to Digital Ecosystems”.