With faster payments, speed catches all the headlines – but the value beyond immediacy deserves real talk on real-time payments. Behind the speed, the faster payments rails carry data and details as well as messaging abilities. According to Colleen Taylor, Executive Vice President, New Payment Flows at Mastercard, faster payments are fighting 40 years of inertia the U.S. payments infrastructure, plus half a dozen powerful myths and misconceptions that must be dispelled before real-time payments adoption can begin to ramp up. On top of that, there are no mandates pushing U.S. consumers, businesses and financial institutions to hurry up and get on the same page about it, as there have been in global markets.
Real-time payments are thus in the very early stages of adoption here in the U.S. However, Taylor and Mercator experts agree that 2019 is the year to focus attention on adoption. The U.S. has a sophisticated payments environment already in place, Taylor says, so once a few major ecosystem players begin to leverage real-time payments, adoptions tipping point will be set in motion.
The Market Today
As a general statement, payments are moving faster. They are progressing from taking days to taking hours, minutes, or even seconds. This is helping to drive increased accessibility of money movement and moving toward an always-on, 24/7 environment, which is what today’s consumers crave.
But to consider the ancillary benefits of real time payments as an afterthought would be a mistake. Real time payments come with real time data – for consumers, this might be a simple payment confirmation ‘your obligation here is fulfilled.’ But for businesses, context is more critical. In order to offer context today, businesses send a payment transaction typically followed by a separate message (like email) to explain what the payment is covering. Real time payments allow businesses (and consumers) to pair transactions with context – and ISO 20022 is a messaging standard to assist that communication. Now payments can travel with an associated message about what they’re for immediately placing each transaction within its proper context – and can help increase major savings in time, money, and hassle.
It’s important to note that faster payments and real-time payments are not exactly the same thing. Understanding this distinction and other terminology around real-time and faster payments will make for a more productive conversation in this “year of adoption.” Here’s a quick rundown of the tools you’ll need to talk about the changes ahead.
Faster payment: A monetary transaction sent and received more quickly than it has been in the past. For example, same-day ACH allows funds to be received in a single day as opposed to Legacy ACH, which could take multiple days.
Real-time payment: A sub-set of faster payments, these monetary transactions are typically sent and received within seconds and come with supporting details that provide greater transaction transparency than in the past. The funds can be sent or received any time, any day. The payee has immediate access to use those funds, even though settlement of the bond between financial institutions does not take place in real time.
Irrevocable: Describing both faster payments in general and real-time payments specifically, irrevocable payments typically cannot be recalled by the payer once the payee has received them, which is why the payee can go ahead and use those funds instantly with confidence.
Ubiquity: Real-time payments only succeed if they’re easily accessible by all or nearly all consumers and businesses.
Social tokens: Identifiers such as a mobile number of an email address used as a proxy or token for an account credential, associated with a bank account number in the financial institution’s database.
ISO 20022: A messaging standard that many real-time payment solutions around the world have adopted or are working to adopt because it creates a common approach to providing payment information to accompany transactions.
Request for payment: Means by which the payee can send the payer a message requesting payment – for example, a biller such as an electrical company asking a customer to pay their monthly bill. The customer can then respond by pushing funds from their account to the utility.
Also worth noting in terms of context is the unique spread of choices available to consumers and businesses in the U.S. market. Without a government mandate for change, ecosystem players like banks and businesses need to develop their own modernization strategies for their institutions and customers. Because the U.S. is a free market, private industry covers the approach to faster payments, and there are a lot of different solutions in the market::.
ACH: The system provided through the government is not real-time, per se, but it is expanding its capability through same-day ACH to deliver transactions more quickly, more frequently.
Network debit push capabilities: Functions such as Mastercard Send® which use the existing debit card networks infrastructure to deliver to almost anyone with a card account.
Zelle and similar: Network that facilitates person-to-person and business-to-consumer transactions through real-time account-to-account transfers.
The Clearing House (TCH): Created a real-time payments infrastructure (RTP), powered by Mastercard’s Vocalink, that’s in use today by some of the largest banks in the U.S.
Federal Reserve (maybe): The Federal Reserve is still evaluating whether to participate by offering settlement and liquidity tools to facilitate real-time payments, as well as operating a real-time payment service of its own.
Mastercard powers one of the big solutions that Taylor believes will move the needle this year: they’re the engine behind The Clearing House’s Real Time Payments platform.
They’re also introducing Bill Pay Exchange this year, a bill payment network that sits atop the real-time rails. Taylor says this has the potential to revolutionize the way consumers pay and interact with billers.
This is in keeping with Mastercard’s broader stated goals around payments application strategy: ‘to solve customer needs through applications which offer payment choice, data richness, and dynamic messaging.’ The idea being to put consumer choice at the center of product vision.
So far, TCH is connected to about half of all bank accounts in the U.S. Mercator analysts predict that this number will soar from 50 percent to 80 percent by the end of 2019. Once that happens, banks that are connected to RTP can (and must) start building on their new ability to initiate faster payments instantly by creating the capability to receive on behalf of their clients. By 2020, we predict that request for pay functions will likely begin to generate significant volume as well.
The Market Tomorrow
To get from here to there, a few things need to happen. First, some common myths and misconceptions that Taylor says must be corrected before users will be ready to move forward with adoption:
- Real-time payments will cannibalize existing card base volume. Cards are only a very small percentage of business-to-business (B2B) flows. Real-time payments are rather moving in to replace paper checks – a welcome and overdue transformation. It’s worth noting that, in geographies where real-time payments have already been introduced, consumer card use has not declined. As with electronic payments, this move is about creating consumer choice, not cannibalizing existing methods and products. Well, except for checks.
- All faster payments are equally fast. While the various faster payment systems may look the same externally, they bring different liquidity positions and different dimensions in terms of notification, clearing, or settlement. The variety of solutions available will help enable real-time payments to meet the needs of many different types of customers with all their diverse needs.
- Faster payments means faster fraud. Increased speed creates different types of fraud risk. This is a reality for any new payment method or infrastructure. Real-time payments may actually be in a better position than many due to the richer data that comes with transactions, which can help to better mitigate risk.
You can achieve the benefits of real-time payments without moving to ISO 20022.
ISO20022 is becoming the industry standard. The ISO20022 is the most robust international framework enabling security, flexibility, and scalability – beyond payment messages RTP uniquely supports rich non-payment messages (e.g. request for pay)
- Real-time payments increase the risk of bank intermediation. Quite the opposite, real-time payments actually offer banks the opportunity to create more compelling value propositions for their customers and to innovate, while also creating a slight barrier to entry from other parts of the ecosystem. Banks that are willing to make the change and drive new solutions for customer pain points can help manage the risk of disintermediation.
- The case for real-time payments is only a regulatory compliance one. The benefits of real-time payments go far beyond marking off a government checkbox. Although some markets have made it a mandate, the private sector approach may work best in the U.S. even if it means slower adoption, because banks are now free to take advantage of new capabilities in order to have the flexibility and features necessary to compete today.
Taylor said it’s important to accept that change won’t happen overnight. Real-time payments enthusiasts must be patient. Again, RTP is fighting decades of inertia in the U.S. market. Participation of early adopters, especially small- and medium-sized banks, will help drive greater adoption across the board.
Connectivity from processors will prove extremely important when it comes to selling RTP among small and medium financial institutions. These smaller institutions need larger players to provide the core systems that enable them to provide this capability to customers.
In addition, greater clarity from the Federal Reserve should help small and medium banks that are on the fence make up their minds. Today, there is some hesitancy because they don’t know how they will gain access to the platform, or even if they’ll be able to. Once the Federal Reserve decides what role it wants to play, this should help inspire some confidence and set the ball rolling on RTP adoption.
Mastercard and Mastercard Send are registered trademarks, and the circles design is a trademark, of Mastercard International Incorporated.
*Actual posting times depend on the receiving financial institution.
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