One of the most buzzed about trends in the payments industry is the rise of real-time and faster payment options. In recent years, more and more consumers and businesses have used novel payment methods to send and receive money faster than traditional payment options have allowed. Interest in real-time and faster payments grew further when the Federal Reserve announced last summer that it was developing FedNow, a real-time payment rail to provide an alternative to The Clearing House’s (TCH) RTP rail.
Despite all the news about faster and real-time payment methods, there is a lot of confusion on the topic. While many use the terms interchangeably, there are different payment types across the spectrum. Moreover, many people are unsure of how common faster and real-time payments are, or even what the use cases consist of. Finally, banks and other financial institutions are often unsure of how to approach using these emerging solutions.
To help the public better understand faster and real-time payments, PaymentsJournal sat down for a discussion with Sarah Grotta and Steve Murphy, two experts from Mercator Advisory Group. Grotta is the director of Mercator’s Debit and Alternative Products Advisory Service and Murphy is the director of Mercator’s Commercial and Enterprise Payments Advisory Service.
During the conversation, Grotta and Murphy discussed the difference between faster and real-time payments, the state of real-time payments in the U.S. by use case, and how banks should be approaching these payment methods.
Confusion in the market and the need for clarification: Faster payments vs. real-time payments
“Many in the industry will use the terms faster and real time fairly interchangeably, and certainly I’m guilty of that,” said Grotta. “But I think that really just points to a bit of the confusion in the market and the need for clarification.”
Put simply, real-time payments are not the same as faster payments, but they are similar. According to Grotta, the best definition of faster payments is laid out by the Federal Reserve’s Faster Payments Task Force.
According to the task force’s definition, a faster payment solution is “a ubiquitous, safe, faster electronic solution for making a broad variety of business and personal payments, supported by a flexible and cost effective means for payment clearing and settlement groups to settle their positions rapidly and with finality.”
In other words, a faster payment is a payment method that posts and settles payments faster than traditional payment rails. Examples of faster payment solutions include Nacha’s Same Day ACH, Zelle, and debit push payments. “They’re all fast, but they don’t necessarily settle in real time,” explained Grotta.
In contrast, real-time payment solutions do settle in real time; payments are initiated and settled almost instantaneously. A prominent example of a real-time rail is The Clearing House’s RTP Network. The Federal Reserve’s FedNow will also be a real-time solution.
To summarize, while real-time payments are a form of faster payments, not all faster payments are real-time.
Over half of U.S. bank accounts are connected are accessible via real-time rails
Even with the confusion around terms, real-time and faster payment methods are rather common. Murphy explained that the latest information from TCH indicated that 28 banks are directly participating in the RTP network.
“What that means is that they are connected to the network and can at least receive real-time payments,” said Murphy. He also noted that there are 19 third party service providers (TPSPs) that are connected to RTP and are capable of providing some level of service to depository institutions. An additional 13 banks are accessing RTP through these TPSPs.
While these numbers may seem low, the amount of bank accounts involved is quite large. By the end of 2019, the RTP Network was reaching nearly 50% of all U.S. bank accounts, according to TCH. The organization predicted that by the end of 2020, almost all bank accounts would be connected.
However, Murphy reasoned that this goal may not be attainable due to COVID-related slowdowns. He estimated that only about 65% of bank accounts are capable of being accessed through RTP at this time.
The many use cases of real-time and faster payments
The most common use case for faster payments is P2P transactions. Platforms such as Zelle and Venmo have been immensely popular among consumers looking to quickly send and receive money. In fact, P2P transactions had been growing around 50% year-over-year prior to the pandemic, said Grotta. Now with COVID-19 disrupting traditional ways of life, P2P volumes will likely rise further.
P2P payments are also becoming real-time as well. Grotta explained how Zelle has integrated with TCH’s RTP, meaning that financial institutions that have integrated into RTP can receive and settle Zelle P2P transactions in real-time.
Another use case is in business-to-consumer (B2C) transactions. The most common B2C faster payment use case is insurance payments. Grotta also highlighted a growing number of rebates and refunds being made along faster or real-time rails, in addition to payroll solutions, especially for gig workers. Consumer-to-business (C2B) transactions along real-time or faster rails are much less common, but on the rise nonetheless.
Similarly, business-to-business payments along real-time or faster rails is relatively uncommon. Back in March, Murphy and Grotta published a report detailing the different RTP use cases in the B2B space based on extensive interviews with product managers at various banks. They found that the use cases were limited, although some companies were using these rails to fund payroll accounts and make last minute invoice payments.
Update on FedNow
The Federal Reserve recently provided an update on FedNow that offered more details around the proposed real-time rail. Grotta noted that based on this announcement and her own research on the topic, it appears as though FedNow will offer the same capabilities as TCH’s RTP network.
This is important because ideally FedNow should be interoperable with RTP. While there are no plans to make them interoperable initially, Grotta is hopeful that the similarities between the two rails will make interoperability easier to achieve in the future.
When it first debuts, FedNow will offer features including simple fraud management tools and some liquidity management capabilities. The initial launch will not include a directory, though Grotta noted it could be added in the future as The Federal Reserve updates and expands FedNow.
FedNow is still on track to go live in 2023 or 2024.
Banks should start exploring faster and real-time payments now
“Many FIs are still really unclear as to what the various faster payment systems do,” pointed out Murphy. Many do not even know what the RTP rail entails. Therefore, “the first thing to do is make sure that you know what the RTP messages are and what capabilities the network provides; what can that bring to your institution on behalf of clients?” he continued.
Because faster and real-time rails are so new, it can be hard to determine the level of interest among customers. Grotta recommended that banks look at how many of their accounts are receiving payments from these payment methods to determine interest levels. For example, an uptick in Same-Day ACH transactions could be an indicator that a bank’s customers are interested in faster payment capabilities.
Then banks should consider how demand will change in the coming years as more fintechs and competitor banks offer real-time payment capabilities. If a bank decides to wait, it may miss out. As a result, Murphy recommended that banks try to stay up with curve rather than fall behind.
Those interested in learning more about faster and real-time payments should register for Mercator Advisory Group’s upcoming webinar on the topic. You can register by filling out the form below.