While faster payments have gained some popularity in the United States, many other countries have surged ahead in adoption. China, Brazil, and the UK have all benefited from proactive measures to promote instant payments. In contrast, the U.S. market, led by RTP and FedNow, holds a smaller share, making steady but slow progress.
What needs to happen for the U.S to catch up? Catching Up with Faster Payments, a report from Javelin Strategy & research, explores this and offers insights from countries that have successfully implemented instant payment programs.
The Factors Driving Instant Payments
In countries where instant payments have become a key part of the financial landscape, they have generally addressed an unmet need. The Chinese government built a real-time payments network that took off like a rocket. This enabled Alipay, a full suite of banking products including instant payments, to achieve ubiquitous adoption by offering merchants a convenient way to get paid.
“Alipay effectively replicated several processes that had existed for a long time in the United States,” said Hugh Thomas, Lead Analyst for Commercial Payments at Javelin, and author of the report. “That’s not a lever that the instant payment folks in the States necessarily have to pull.”
Another reason faster payments have succeeded in other parts of the world, including Brazil and India, is the prevalence of sole proprietors. In fact, 58% of consumers in India effectively work for themselves, blurring the lines between peer-to-peer, B2B, and B2C payments. These processes have also helped many unbanked individuals in these countries access financial services. In India and Brazil, having a bank account is not necessary to participate in the real-time payments ecosystem.
On top of that, faster payments help mitigate the effects of persistent double-digit inflation, such as that seen in Brazil. If an employee or vendor does not receive payment on the day they earn their money, those funds will have diminished value in just weeks.
Growing Use Cases in the U.S.
While many of these factors are not present in the U.S. to the same extent, there are emerging use cases, such as down payments on vehicles. When someone buys a new car, instead of carrying a cashier’s check to the dealer, the consumer can transfer the funds as a real-time payment directly into the car dealer’s account. This not only makes the transaction faster in the long run but also more secure.
One factor that could help accelerate the adoption of faster payments is the reduced cost per transaction, especially when compared to wire transfers. While buyers typically don’t bear these costs, as they are passed on to the merchant, they are certainly aware of them.
“B2B buyers are conscious of the expense to the point of very much understanding the P&L of the bank that is taking on their business,” Thomas said. “Every treasurer worth their salt knows exactly what the risk-adjusted return on capital is not just on their own business but for the bank as well. There’s a tremendous degree of understanding among treasurers and the banks that they work with.”
Buyers also appreciate the benefits of the time value of money. With an ACH transaction, they can lose two or three days while the money is lost in the ether. Instant payments obviate those concerns.
Wire transfers can be very expensive, typically costing $40 or $50 per transaction. Large brokerage firms that need to move substantial amounts of money around still rely on them because wire transfers often require a human intervention to complete. Faster payments have the potential to replace wires, as they could provide the same immediacy of payment without the manual intervention that wires often require.
Solutions in the UK
Launched in 2008, the UK’s Faster Payments Service (FPS) is often cited as the gold standard for real-time payments in a developed market. The solution offers users the ability to execute one-time payments and also provides several business-friendly options, such as forward-dated payments and recurrent/standing-order payments.
Innovation in the UK was facilitated by the relatively small number of players in the country’s financial services market, compared to those in the United States. This allowed third-party providers to step in and create their own solutions.
“It helped that UK banks did not have to bet on VHS versus Betamax in terms of building solutions to one network or another,” said Thomas. “Whereas in the States, they were asked to choose between The Clearing House and FedNow.”
Concerns Around Fraud
Real-time payments introduce a whole new approach to managing fraud and liquidity. Once processed, these payments are virtually impossible to reverse. While fraud management systems are available, the question remains: who will bear the cost.
“The instant payment situation that banks try to watch for is where the customer pulls money from one account to another account,” said Thomas. “They immediately shunt the money off to a third account that is likely in a jurisdiction without extradition or something like that. And the money is gone. Because ACH was slower, banks had greater control over the processes.”
Inertia Trumps Innovation
Even without a compelling use case, real-time payments may become table stakes for full-service U.S. banks. Banks do not want customers to feel the need to go somewhere else to complete an instant payment.
However, adoption may be slower, as the United States already has a strong and reliable payment system in place.
“If you say, OK, here’s this extra thing that’s a change in the way of doing things, adoption is going to be slow,” said Thomas. “You’re going to have to make a strong business case for that or come out with a plug-and-play solution for making that happen. That’s not going to happen overnight. Inertia generally tends to trump innovation.”
