Within the last year we’ve witnessed two major milestones related to faster payments in the U.S. In September 2017, the Zelle Network® (Zelle) was released by a consortium of banks. This initiative was quickly followed by The Clearing House as it launched its RTP network, a new clearing and interbank settlement network, with the first-ever RTP payment exchanged between BNY Mellon and US Bank on November 14, 2017.
One could argue that the U.S. faster payments revolution is in full swing. However, to reach the Federal Reserve’s 2020 target for faster payments to be available to every business and consumer, many more banks will need to participate. We’ve talked to many banking, business and technology leaders contemplating the move to faster payments and took a pulse as to their findings – one year on from the original launch of Zelle and TCH RTP.
The movers and shakers
Looking at the numbers, the uptake of faster payments is strong. In the third quarter of 2018, Zelle moved 116m transactions, an increase of 16 percent over the previous quarter, for a total of $32bn in transaction volume.
“While it’s too early to disclose numbers for TCH RTP, we’re confident that we are meeting our original target of covering 50 percent of accounts by the end of 2018, and near-ubiquity by 2020,” said Steve Ledford, SVP Products and Strategy, The Clearing House.
Nevertheless, the U.S. is a large market and there is much ground that has yet to be covered. It’s also worth noting that even in the UK, a smaller market where UK Faster Payments participation was a regulatory mandate, it took eight years to reach a billion payments annually.
But I already have same-day ACH!
A number of U.S. bank representatives are quick to point out that they already make same-day ACH available to their clients. Surely that covers most of the bases?
Not necessarily. It ultimately depends on what you are trying to offer your customers and how you are intending to compete. Same-day ACH is certainly faster than traditional ACH. However, unlike RTP and Zelle, it is not real-time between participants and not 24/7. So, same day ACH eliminates a large number of potential consumer and business use cases such as non-business day payments, e-commerce/point-of-sale, and payment-on-delivery that drive adoption of real-time / instant payment mechanisms.
Ultimately, banks that wish to compete across all the use cases, and retain and grow market share, will need to move beyond same-day ACH.
Zelle vs. TCH RTP
One assumption that we often come across is the notion that Zelle is for retail payments while TCH RTP is aimed at businesses. Certainly the way the services are marketed tends to reinforce this perception.
“However, this is a misconception,” says Carl Slabicki, Director Treasury Services, BNY Mellon. “We’re finding there’s definitely a place for tokenized payments in the business world. Over half of those payments are still made by check, and often that’s because for B2C payments, the payers don’t have access to the consumers bank information. Providing our business and white-label bank customers with a “Disbursements with Zelle” solution as a means to facilitate business payments to consumers, based on their email contact information, is proving very popular.”
On the flip side, Ledford said that it is clear that RTP, while highly optimized for B2B payments, was always designed to address retail and P2P use cases as well.
Banks should therefore be looking at both Zelle and RTP, and indeed other networks, as viable service options for faster payments, for both retail and commercial applications.
My customers do not want to pay faster.
We hear it all the time: my corporate customers aren’t interested in paying faster. Ask a typical corporate treasurer and they will say no. However, what if you ask if they would prefer to hold on to their money until the last minute? Surely that would change the answer? And if you now follow with the question of whether they would prefer to receive payments faster, you’ll get a resounding yes.
So, the answer depends on how you position the value proposition of faster payments. There are significant opportunities for faster payments in the disbursements area, because treasurers can release funds at point of need, reducing idle cash and optimizing working capital. On the receivables side, it’s not just about getting paid faster, it’s also about receiving full remittance data with the payment in an ISO 20022 envelope, reducing reconciliation effort.
There is also huge value to businesses in the Request for Pay mechanism built into RTP, which effectively helps banks to embed themselves in the supply chain – and to reduce invoice fraud, a significant cause of cash leakage from corporate treasuries, in some cases costing up to $100,000 per event.
And, let’s not lose sight of the opportunity for financial institutions to deliver new value-added services to their consumer and business customers, by combining payments and informational messages on the same rails. In addition to Request For Pay, real-time messaging capabilities can include adjustment notifications, requests for information, and other typical elements of a payment transaction. The fact that all of this can take place over the same channel as the payment, via a secure bank grade network, is just as important as the immediacy of the payment.
The charge conundrum
There is clear precedent for charging for faster payments in other jurisdictions–particularly charging businesses. The general guideline seems to be: much less than a wire but more than ACH. Sweden’s SWISH charges Swedish businesses between $0.16–$0.22 per transaction; UK banks charge anywhere between 35p to several pounds per UK Faster Payment sent; some banks in Singapore have recently moved to cut transaction fees to SGD 0.50 per item, or about $0.37.
Ultimately, the focus should be on identifying the value-added services that banks can provide on top of a faster payments network. In short, let’s charge for value rather than speed.
Slabicki says, “It’s really about service level rather than raw speed. Do you want finality? Do you have all the information you need with the payment? On the request for pay side, how is the invoice being presented today? Can you help with short-pay scenarios, or offer to enrich payments that are missing information? There are a host of opportunities for differentiated value-added service provision that come with faster payments, and that is how banks need to look at it.”
Options. Options. Options.
The good news is that there are a wide range of options for banks looking to take the plunge into the world of faster payments. Many of them require little significant upfront investment in effort or cost.
If you’re a smaller bank and are not quite ready to connect directly to any of the faster payments networks, one option is to use a service offering from a larger financial institution that provides both network connectivity and operational servicing. This way, the connecting bank can focus on designing its customer value proposition.
An alternative is to use a fintech solution. Cloud-based solutions are particularly attractive, since initial volumes will be low, and budgets can be focused on marketing and rollout of the service rather than infrastructure investment.
Regardless of the deployment model, it is perfectly feasible to start with a receive-only implementation, enabling participation in faster payments networks without requiring changes to the customer experience layer. The latter can always be enhanced to support initiation over time.
Let’s look on the bright side. Many of the early-days challenges of faster payments implementations, such as 24×7 uptime, ISO20022 knowledge and real-time enablement of batch systems, are now no longer blockers to adoption. We have solutions that address and automate these challenges. The technology is available. It’s up to the banks now to come up with the right business model for their market to justify the technology, and thus meet the industry’s common goal, to make faster payments the norm for the electronic exchange of value.